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. To prevent this, you may want to reward them with special financial percs and benefits such as extra life insurance or retirement plans to create either additional tax-free income or guaranteed "pension" style income in retirement. For others, you may want to provide them with a first class disability income protection policy.
BUT to keep them around and maintain their loyalty you may want "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. This can be done with a "REBA," (Restrictive Endorsement Bonus Arrangement).
"Customized Bonus Planning" or (CBP) is the employer's ability to pick and choose which employees deserve an enhanced financial planning bonus BASED ON MERIT.
Unlike group medical insurance or standard retirement programs like 401Ks, SEPS, Simple IRAs which require that everyone be covered and treated the same, with CBP, the employer can pick and choose and have much more control over who gets what via IRS code Sec. 162 which covers "Executive Bonus Arrangements."
In our CBP platform, we sit down with you the employer, and go over which employees you would like to provide a bonus to in order to reward them individually. This can be very helpful for both attracting and retaining the best talent for your business. In this arrangement, you decide on an "amount," you are willing and wanting to bonus the employee - then, if you wish, we can sit down with each employee and their spouse if applicable and do customized benefits planning to use this bonus for a variety of financial planning and insurance benefits:
Everyone is unique. Some people only need life insurance, others may be more concerened about having enough money for retirement. Others might be concerned about protecting their cash flow and income if they get sick or hurt on or off the job and can't work to earn an income, so disability insurance is in order. Thus, "Customized Benefits" can be put together for each employee on a one-on-one basis and receive advice and real guidance from an expert.
Working with you and your payroll department, we can then set up list bills. You might have X number of people getting life insurance, and X number of people getting DI or an IRA.
And just like we do with "Key Person" insurance, we can apply "Golden Handcuffs" using the "Restrictive Endorsement Bonus Arrangement," or (REBA).