A crucial issue for a closely held business that wishes to buy out one of its principal ownwrs is whether it will have the funds to do so. Because so few business have sufficient cash or other resources to fund a buyout, the seller usually must accept an installment payout and continue to share the risks of the future profitability of the business unless the business has provided for a fund to buy out the major owner.
There are essentially three methods for funding a buyout: borrowing from a party, setting up a shrinking fund or reserve, or acquiring insurance.
If the business has the borrowing capacity or available cash to fund a buy-sell agreement, the cost of life insurance should be comparted with the cost of borrowing money or using the company’s own funds. Insurance contracts are extremely competiviely priced and usually very cost effective. However, there are many factors to consider in making a comparison, including the ages and health of the insureds, which might push premium rates to the point that other options should be seriously considered, and the fact that the insurace may never be collected should retirement occur before death.
About the Author
Attorney Steven Peck has been practicing law since 1981. A former successful business owner, Mr. Peck initially focused his legal career on business law. Within the first three years, after some colleagues and friend’s parents endured nursing home neglect and elder abuse, he continued his education to begin practicing elder law and nursing home abuse law.