Protect Your Staffing Company through Buy-Sell Agreements
Often times when I speak with staffing owners, we’re concentrating mostly on the business right now. Here's an excerpt from an article I wrote for Staffing Industry Analysts' Staffing Stream blog that discusses protecting your company’s future.
As an owner, you’re focused on the day-to-day issues facing your staffing business, but you also need to focus on tomorrow’s issues. For instance, what’ll happen to your business upon your death or disability? Most people delay the implementation of protective measures because they don’t want to face this eventuality. However, there are certain measures you need to take now to protect the integrity and future of your company. The most common method is to institute a solid buy-sell agreement, which is typically funded by life insurance.
The main purpose of a buy-sell agreement is to keep your business running after your (or another owner) departs from the business. It provides a smooth transition in control and ownership of the business, thus preserving the value of the business. It also ensures there’ll be a ready market for your business, and with life insurance in place, the ability to fund the transition of ownership.
Of course there’ll be some tough decisions to make, including:
- What events will trigger the agreement?
- Who should purchase the shares?
- How much will be paid?
- How will the purchase be funded?
Death, retirement, withdrawal from employment, divorce, or a contemplated sale to a third party are all valid reasons for a buy-sell agreement.
The agreement also sets the value of the business for estate tax purposes, and this ‘arms-length’ transaction helps reduce the possibility of an IRS challenge to the value of the company. The agreement helps expedite your estate’s disposition, generally assures family members will be guaranteed timely payment, and alleviates disputes and suits between family members and business partners.
Life insurance is the most common method of funding a buy-sell upon the death of an owner. Assuming proper limits, a valid life insurance policy is the only mechanism that virtually guarantees the immediate availability of the full buyout amount upon your death. A life insurance policy is also tax advantaged. Under the current laws, life insurance benefits are paid tax-free to the beneficiary(ies).
Like any business-related document, your buy-sell and any life insurance intended to fund it should be reviewed periodically by a professional advisor who understands this mechanism in depth. As the business grows or undergoes other changes, the buy-sell and any funding mechanism will need to be adapted.
Your buy-sell will also work to keep out unintended shareholders. Establishing a buy-sell and funding it with life insurance prevents unwanted parties from acquiring an ownership interest in your business. Proper planning will also help preclude family members, competitors or other third parties from acquiring or claiming a stake in your company.
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