At the very beginning of this blog, I said there are three levels of a Business Succession plan. The first and basic level is to have a good idea of how you would like to transfer, pass on your interest in the business. This could be verbalized to family members, partners or even employees. The key is that nothing has been formalized. In the second stage, you have selected a Buy-Sell agreement and have it drafted and authorized. Is that the end? No. The third and final stage is to fund your Buy-Sell agreement. Cash must come from somewhere to sell your business interests. So how can one go about funding the Buy-Sell plan?
To answer that question, it would be helpful to understand that the two most common “triggering events” to sell your interests in your business are a premature death and/or a long term disability. Consequently, the financial instrument used must provide a fair amount of cash at the exact time when it’s needed the most. The idea is that you want a method that will initiate a trouble-free transfer that is the most cost-effective, easily administered on a tax-efficient manner and would not harm the cash or credit position of the business.
You may be surprised to find out that there are many vehicles, techinques you can use to fund your Buy-Sell Program. You actually have TEN different vehicles to use. Some are widely known but others are relatively unknown. Here is a specific breakdown.
Use Cash
Borrow Funds
Initiate a series of Installment Payments
Use proceeds from Insurance Policies
Start a Private Annuity
Do a Stock Redemption ( previously discussed under Section 303)
Sale-Leaseback
Non-Qualified Deferred Compensation Plan
Appreciated Property Bail-out, or
Combination of two or more of the above named mechanisms
In the next series of posts we will examine the particulars of these various methods.