If you are a partner in a small business, succession planning is something that you are going to have to take into consideration. Many people who are part owners of a small business would tell you that their stake in the enterprise is the single most valuable asset that they have. But simply leaving your share of the business to your loved ones is not always going to be the answer.
Your family members may not want to be engaged in helping to run the business should you become disabled or pass away. And by the same token your remaining partners may not necessarily want to enter into a partnership with your heirs, but of course you may well feel the same way about the heirs of your partners.
One way that these types of situations are resolved is through the creation of what are called buy-sell agreements. The two that we will look at here are the entity plan and the cross purchase plan.
The entity plan involves the business entity itself purchasing life insurance policies on the partners equal to the value of each individual’s stake in the business. Should one of the partners pass away the funds that are paid out by the insurance policy are used to buy this partner’s share from his or her estate according to the terms of the agreement that all of the partners entered into upon creation of the plan.
With the cross purchase plan the partners in the business decide on its value. Each partner then takes out an insurance policy on every other, the total of which is calculated to equal one ownership share. Upon the death of one of the partners the proceeds that are collected from the insurance policies are used to purchase the deceased partner’s share of the business from his or her estate.