Protect Your Partnership With an Insured Buy Sell Agreement

It’s not an event that occurs every day, but it is something you
should think about and plan for. If you have an O&P partnership business,
and your partner dies, you may have some significant issues to deal with.

You may have a wonderful working relationship with the family of your
business partner — and that’s great. But after your partner’s
death, things can change, and business is business. What if you love working
with your business partner, but you detest his or her spouse? Who would be your
worst nightmare for a business partner? Why is that? Will you both have the
same goals for the business going forward? Will they do their fair share of the
work? Are they certified in O&P?

Or, what if it was the other way around? If you died in a car accident
tomorrow, do you want your family to be dependent upon your business partner to
cut them a check each month? What if your partner goes bankrupt? What if they
die or become disabled before paying off your loved ones? Instead of agonizing
over these concerns, would you prefer for your partner to buy them out?

Have you heard of a Buy Sell Agreement? It simply says when one partner
dies, the deceased’s estate will agree to sell their share back to the
business, and the business will agree to buy back the stock. It keeps things
tidy and makes for a smooth transition.

Various attorneys, CPAs and those involved in the business brokerage and
business acquisition industry can help you do an accurate business valuation to
determine the correct value of your O&P business.

Let’s say you have the written agreement in place, but where is the
money supposed to come from for the buy-out? There are different ways to make
this happen, and some are a lot better than others. Let’s examine the
sources and you can decide what makes the most sense.

  • Savings fund: If you had to, could you write a check tomorrow for
    50% or more of the value of your business? Probably not. How much would you
    have to net after expenses and taxes to save that kind of money? How long would
    it take? Enough said.
  • Current income: Could you afford to run your business, remain
    profitable, still pay yourself a salary, and have enough money left over to pay
    off your deceased partner’s estate? How long would that take? Not a viable
  • Borrowing: This also costs 100 cents on the dollar, and interest on
    top of that. And besides, ever since banks got bailed out – how many are
    happy to lend money to businesses right now anyway?
  • A better solution might be life
    insurance. What if business partners took out a policy on one
    another? This is usually called a Cross Purchase agreement. If the business
    owns the policies, it’s usually called a Stock Redemption agreement. Life
    insurance is purchased with deeply discounted dollars for pennies on the
    dollar, and pays substantial tax-free cash. The event that causes the problem
    (the death), is the very event that triggers the desperately needed cash
    provided by the insurance.

What if someone is not as insurable as someone else? Or what if there is
a substantial age and cost difference between partners? Sometimes it may make
sense to have a business own the policies to average out the cost and make it
more fair.

Having a thoughtful, clearly written Buy Sell Agreement for your
partnership O&P business, adequately funded through life insurance, should
be part of every successful business plan. Because this is not your basic term
policy to cover a mortgage, it is recommended you work with a life insurance
professional versed in the use of life insurance to fund these types of

Todd Radwick is president of Radwick
Financial Group LLC. He can be reached at (800) 314-2999; email:;

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