Business Succession Planning - Sale to Third Party

Retention of the Business for the Family | Sale of the Business to Co-Owners, Employee or Third Party | Planned Liquidation of the Business

Without a capable family member to continue the business, it can be difficult to preserve the value of a small business interest, unless a market for the business is created prior to the owner's death or disability.

When a potential buyer for a small business interest can be identified, for example a co-owner, a key employee, or a third party, advance planning can provide for an agreement to sell your business at an attractive price. This sale agreement is often referred to as a "Buy-Sell Agreement."

There are four common ways to fund a Buy-Sell plan at the death or disability of a business owner.

1. Cash Method: The buyer(s) could accumulate sufficient cash to purchase the business at the owner's death. This could, however, take several years, while the funds might be needed sooner.
2. Installment Method: The purchase price could be paid in installments after the owner's death. For the buyer, this could mean a drain on business income for years.
3. Loan Method: Assuming that the new owner(s) could obtain a business loan, borrowing the purchase price requires that future business income be used to repay the loan plus interest.
4. Insured Method: Life insurance can help guarantee that the cash needed to complete the sale will be available exactly when needed at the owner's death, assuming that the business has been accurately valued.* Disability insurance can play the same role, should a disability prevent the owner from continuing in the business.

The following techniques can be used in conjunction with your buy-sell agreement: Cross-Purchase, Stock Redemption, and Entity Purchase. Each situation is different; our analysis will help you decide which method is preferable for you.

Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.

*All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.