Legendary basketball player, coach, and executive, Phil Jackson, believes “The strength of the team is each individual member. The strength of each member is the team.”
Frequently compared, business resembles sports. Companies are often led by partners bringing unique talents to the game of business. Great partnerships thrive because of the offsetting attributes.
Many businesses are led by two or three partners and they generally fit into one of four buckets:
- They have no operating agreement
- They have an operating agreement – but it doesn’t address a potential sale and purchase of a partner’s stock
- Their operating agreement addresses the potential sale and purchase of stock but the contingency is not funded
- The contingency is funded with a “Buy/Sell” Life insurance policy
In case there’s any doubt, you want to be in that fourth bucket.
Even though the third bucket is a step in the right direction, its consequences can be ruinously expensive because you (or, more accurately, your family or estate) is obligated to sell your stock and your surviving partners (or the business itself) are obligated to buy it – but there’s nothing in the budget to pay for your stock! Queue the lawyers.
The first two buckets can really be combined into one: there’s no deal, so your stock goes to your family or estate, in which case, guess what happens. The surviving partners now have a new partner: your spouse!
A properly executed Purchase and Sale (or Buy/Sell) Agreement is supported by a Buy/Sell Life insurance policy. Secured by one partner on the life of another (“Cross-Purchase”) or by the company on each partner (“Stock Redemption”), Buy/Sell Life policies create a funding mechanism for the survivors of the deceased partner to sell that person’s stock to either the other partner(s) or the company, resulting in the survivors owning 100% of the business, and the family or estate of the deceased partner getting compensated for the value of the deceased partner’s stock.
Insurance isn’t a game, but can be a key play in navigating life’s unexpected events. Your best game plan: purchase Buy/Sell insurance for just such an occurrence.
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The Chicken or the Egg
When I left the security of a steady paycheck to build an insurance agency with my brother, I didn’t realize that in order to place an insurance policy you need to be under contract with an insurance company.
For an insurance guy, I’m a pretty good writer, although I’m no Tom Clancy. He began his career as an insurance agent. He was also a Baltimorean. Maybe it’s something in the water.
