When you are the owner of a business in partnership with others the matter of succession is something to consider when you are planning your estate. The dynamic that exists between partners in a privately owned business is unique. When one of them passes away or leaves for some other reason the remaining partners are usually going to want to retain control of the business.
For example, if you leave your share to your family and none of your heirs has any interest in helping run the business, what do they do with their inheritance? They would probably sell it and the buyer’s vision may not be resonant with the remaining partners. Perhaps worse yet, a well meaning family member may want to take your place as an active partner without the proper experience and expertise to the detriment of the business.
These scenarios can be avoided through the execution of a buy-sell agreement. There are two primary ways that this is done, and the first one we will look at is the cross purchase plan. To employ this strategy each partner takes out a life insurance policy on every other, the total of which equals the value of a full partnership share. Upon the death of one partner the proceeds from the insurance policies are used to buy the deceased partner’s share from his or her estate.
The other method is the entity plan. With this succession plan the business entity itself purchases life insurance on each partner. Should one of them pass away, the policy proceeds are used to purchase that ownership share from the heirs of the deceased.
It should be mentioned that insurance proceeds are not the only way to facilitate a buy-sell agreement. The purchase of the departing co-owner’s share from his or her estate can be done through a cash buyout with saving accumulated by the business for succession purposes or with funds acquired through a business loan.