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Small Business Continuity Plans

2 December 2009 7,353 views 3 Comments

As entrepreneurs we make many decisions each day in order to run our business effectively, but what happens if we’re not there to run it ? How will our families fare ? We need a plan…….


–Chris Jorgensen–

Much of the wealth in this country has been created through the efforts of small business owners.  Small business owners are an incredibly hard working group.  Often, virtually every waking hour is spent helping the business grow.  The family may be involved in the business.  No one deserves their wealth more than someone who has overcome the odds and created a successful business.

But these entrepreneurs can be a difficult group.  They are so tied up in their businesses that they often don’t take time to plan.  They can be secretive about their affairs and unwilling to trust the fate of their business to “outsiders.”  And yet, if a business owner fails to plan for his/her eventual death or retirement, or the possibility that they may become disabled, the business owner is literally risking that which he/she holds so dear…the business itself.  Buy/sell agreements can help.

Simply stated, a buy/sell agreement obligates one party to sell and another to buy some or all of a business interest upon the occurrence of some designated event, typically death, disability and/or retirement.  To be most effective, buy/sell agreements should be accompanied by some type of a funding mechanism to provide the buyer with the cash needed to meet the obligation.

Life insurance and disability insurance are most often used to fund buy/sell agreements in the event of death and disability, respectively.  A cash value life insurance policy can also be used to provide cash to the buyer in the event of retirement.  A buy/sell agreement may also be structured to provide for installment payments from the buyer to the seller.  A buy/sell agreement can be created for both incorporated and unincorporated businesses.  For federal estate tax purposes, the buy/sell agreement must be structured as an arm’s length agreement providing for a fair price to be paid.  This allows the owners to plan their estates and can reduce the risk of costly valuation disputes among business owners or upon estate tax audit.

There are two basic forms for the buy/sell agreement.  The first is the cross purchase agreement.  Under a cross purchase agreement, the owners of the business enter into the buy/sell agreement among themselves obligating each other.  For example, Winken and Blinken are equal shareholders of X Inc.  Under the cross purchase agreement Winken and Blinken each agree to buy the other’s half of the business in the event of the other’s death, disability or retirement.  To fund the agreement, each buys a cash value life insurance policy on the life of the other.   Upon one of the triggering events, the remaining shareholder will use the proceeds of the policy to carry out their obligation to purchase the business.

The cross purchase agreement is very popular with companies having few owners.  The surviving owners benefit from an increase in their cost basis when the purchase is ultimately made.  The cross purchase agreement becomes more difficult to fund when there are more than two owners. For example, if Winken and Blinken were joined by Nod, a total of six life insurance policies would be required.  Also, the premiums on the policy may vary based on the ages and health of the owners.

With an entity purchase agreement (also called a redemption agreement), the owners of the business contract with the company itself.  The company is then obligated to buy the share of the owner who has died, retired or become disabled.  If the agreement is funded, the policies are owned by the company.  Redemption agreements can be structured to take advantage of special estate tax rules (Sec. 303) and they may reduce the number of policies required.

By utilizing some form of a buy/sell agreement, the small business owner insures the continuance of the business he/she has worked so hard to create.  This makes life much easier for the remaining partner(s) in the business as well as the family members.

Of course, this brief article is no substitute for a careful consideration of all of the advantages and disadvantages of this matter in light of your unique personal circumstances.  Before implementing any significant tax or financial planning strategy, contact your financial planner, attorney or tax advisor as appropriate.

This material was prepared by Raymond James for use by Christopher S. Jorgensen of Raymond James Financial Services, Inc. Member FINRA/SIPC.

Chris Jorgenson has over 18 years of experience in the financial services industry. Mr. Jorgenson opened CS Jorgensen and Co., Inc. in February of 2008 having come from Smith Barney. He works with his clients, families and small business’ to develop and implement financial plans to achieve their goals. He has 2 children and lives in Smithown, being active in the community by coaching and volunteering as a Cub Scout leader.


  • Jessica Blond said:

    Great article and interesting topic! In the BCP/COOP world we often focus about how to continue operations after an unexpected disaster and think about alternate site planning, resource allocations, vital records, etc… but this definitely explores a diffent angle of ensuring continuity.

  • Shi Ming Chung said:

    The buy/sell agreement is a great addition to a business continuity plan for a small business. For small businesses, quickly ensuring that the proper owner is in control of the business is crucial to its operations. With larger businesses, this process is already incorporated in the bylaws, but is overlooked in small businesses many times. Interesting article.

    How quickly can a buy/sell agreement be executed? Is there an insurance policy that covers the “business owner” and not a specific person (to avoid cross purchase agreements)?

  • David Blond said:

    I learned something from this article. Service type businesses often contract for more than one year so that if, for example, my business were to close, then I would leave my partners in a lurch. Insurance may be one option to handle this problem. Another option would be to allow the partner to take control of at least the parts of the information stream that are needed to meet client obligations.