A "Buy/Sell Agreement" is a formal written agreement between two or more business partners that is designed to provide a smooth transition and change of ownership when a partner leaves a business, firm or practice:
A formal agreement is important because it establishes a very clear purchase price and value for the business and stipulates the conditions on how a buy/out will happen. It makes things very smooth and efficient. Without one, things can easily get messy and complicated and involve litigation and cause hard feelings between business partners and friends and family.
Buy/Sell Life Insurance and Disability Insurance provide the necessary LIQUID CASH precisely when it is needed so a business partner or their estate can be bought out if they die or become totally disabled. This is critical because businesses and partners simply do not keep massive amounts of liquid cash on hand to buy out a partner. The money is all tied up in the business. Getting a loan is HUGELY expensive and lenders may not want to loan the money knowing one of the key players of the business is now out of the picture.
There are two types of Insured Buy/Sell Agreements:
Your "Key Employees" are those who are a major contributor to the success of your business. They seem irreplaceable. It would be a huge disaster, headache and financial burden if they simply failed to show up to work one day with zero notice. That's exactly what happens when someone dies instantly or become sick or injured and totally disabled and unable to work.
Your business will need lots of extra liquid capital to weather the storm and attract and hire a replacement. You may need to provide an incentive signing bonus to get the talent you want.
"Key Person" policies might be used to insure an actual W2 employee, but they can also be used in partnership situations to insure partners with distinctly different talents and skill sets. For example, maybe one partner has particularly good hands-on medical skills with actual patients, and another partner is less so, but is fantastic at all the business administrative, payroll, billing, insurance and management duties. Perhaps another partner is great when it comes to marketing and compliance.
In addition to a death or total disability, you may also be simply concerned that a highly valued "Key Employee," might find greener pastures elsewhere and leave for the competition; total compensation and benefits do matter. Key Person policies can also be structured so there is "something in it for them," providing them and their family life insurance and disability benefits as well - BUT with "Golden Handcuffs" attached, i.e. conditions where these benefits only pay as long as they are loyal to your practice, firm, or business and do not leave; they do not need to be vested like normal benefits, such as a 401K.