Essentially if two (or more) guys own a company, and one of them dies, how does the survivor buy out the rest of the company from the deceased?
Well if the dead guy is married, his wife gets his shares automatically. Does the surviving business owner want to work with the widow? Can the widow replace the dead guy as far as income generation, or jobs that he used to do? No probably not.
Can the surviving partner get a bank loan to buy back the shares immediate after the death of a partner? Is there a new partner than can buy in? Is there some angel investor that will solve the problem? No probably not.
What usually happens is that the surviving owner keeps plugging away at the business on his own as best he can, and slowly, over years, buys back shares from the widow, all the while the widow is entitled to half the profits and dividends from the company.
What they need is a life insurance policy on the lives of each partner designed to pay out to the survivor at the time of death. The survivor uses the insurance proceeds to buy back the shares from the widow. The survivor owns the company outright, and the widow gets her cash.
But what if one of the partners is uninsurable? Some health condition prevents one partner from getting any coverage. That scenario usually kills the whole deal, since only one partner stands to benefit. There is, however, a creative solution we can use to get around this problem. Since the partners own a business, they likely have an Employee Benefits Plan. This plan probably includes some amount of Life Insurance. Furthermore, in the group insurance world, "If you are healthy enough to be at work, you are healthy enough to insure". Because of this attitude everyone is approved, to a point. That point is a No Evidence Maximum (NEM). All carriers use a NEM for Life, AD&D, Disability and Critical Illness. A very small group of only 2 or 3 employees is still guaranteed about $150,000 of Life Insurance, no questions asked. In a larger group of 25 employees this No Evidence Maximum might be $250,000 no questions asked.
By making the beneficiary of the Group Life Insurance the other business partner or the company itself, an insured Buy/Sell agreement can still be implemented. While there are drawbacks to the group insurance method such as limited maximums, annually variable rates, difficulty when changing carriers, possible pre-existing condition exclusions, etc. it is still provides a possible solution where there might have not been one before.
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Robert Reynolds, GBA
Certified Group Benefits Advisor
Hendry McKenzie Reynolds Employee Benefits Ltd.
Toll Free: 1-888-592-4614
rob@hmrinsurance.ca
www.hmrinsurance.ca
E.O. E.
