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The Key Plan Small Business Owners Might Be Overlooking

Important contingency planning and preparation can help mitigate risk


Every year in early May, we celebrate small businesses and the role they play in our economy. But in addition to acknowledging the contributions of these "mom-and-pop" shops, we also need to recognize the unique and broad set of challenges small business owners face every day.

When you’re starting or growing a small business, chasing the next client or deal often feels like the be-all end-all priority. As a result, important contingency planning and preparation often get overlooked, leaving business owners exposed to risks they may not understand or be aware of.

One such example, specifically for jointly-owned and operated businesses, is establishing a buy-sell agreement – an agreement that protects business owners in the event of a premature death, unexpected disability or divorce. With no succession plan or buy-sell agreement, an unexpected death or disability in a business almost always leads to the ultimate demise of the company.

Below are a few key considerations for establishing a well-constructed and funded buy-sell agreement to ensure growth, continuity and sustainability for your small business.


A buy-sell agreement establishes a fair value for your ownership shares using either a valuation formula or by setting a value outright.

Having a valuation for your business can help avoid potential conflicts should a former business owner or their beneficiary demand more for their ownership interest than you believe they’re worth. Often, small business owners agree to a number that they would be willing to accept today, or in the near future, should one of them be unable to work or have a premature death. Once constructed, owners should revisit and reevaluate this agreement as the company valuation changes.



Should a owner become disabled or die prematurely, the business or surviving owners will need the funding to purchase the deceased or disabled owner’s shares from the surviving family or estate. The most common and cost-effective way to fund a buy sell agreement is using life and disability buyout insurance. 

With an entity-redemption agreement, the business purchases separate life and disability buyout insurance contracts on the lives of each owner, pays the premiums, and is the owner and beneficiary of the contract. When an owner passes away or becomes disabled, the business uses the income-tax-free death benefit or disability payment to purchase the deceased or disabled owner’s interest. 

With a cross-purchase buy-sell, each owner purchases a policy on the other owner(s). Should the same occur, the surviving owner(s) use the death benefit or disability payment to purchase the deceased or disabled owner’s interest.



You can fund a buy-sell agreement with term or permanent life insurance; each has its own benefits.

Term insurance provides temporary coverage for a specific window of time, is generally inexpensive and is a common starting point for a young business to fund their agreement. 

Permanent life insurance, on the other hand, offers protection for life. In addition to the death benefit it provides, permanent life also accumulates guaranteed cash value. That money can be accessed to fund all or a portion of a buy-sell agreement, should you or one of your owners leave for a reason other than death. Owners have looked at those policies as a secondary method to save money within the business outside of traditional retirement plans.

When you retire, you may be able to have the ownership of the policy on your life transferred and take the policy with you. That would enable you to name your own beneficiary for the death benefit and use any accumulated cash value to supplement your retirement income, fund a new business, or utilize as you choose. There may be tax implications with the transfer of your policy, so consult your tax advisor first.

A well-crafted, properly funded and up-to-date buy-sell agreement can offer small business owners peace of mind that their company and family will be protected if something happened to one of their owners. It also provides the owners with clarity on who can buy in to the business and how the process will work, avoiding expensive litigation down the road.

If you think a buy-sell agreement could benefit you and your business, consult a financial professional – having a third-party offer advice and expertise can be invaluable in safeguarding your finances for the future, so you can put more toward the things you really enjoy in life today.


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Royce Zimmerman

About Royce Zimmerman

Royce Zimmerman, CPA, CFP, CLU, ChFC, is a wealth management advisor at Royce Zimmerman & Associates of Northwestern Mutual. He graduated from the Business School at the University of Wisconsin – Madison with honors in 2001 with a degree in Accounting. He earned a Masters of Accountancy in 2002 from Madison and earned his CPA license. Royce can be reached at 303-512-2170 or royce.zimmerman@nm.com

Disclosure: This publication is not intended as legal or tax advice. Northwestern Mutual Advisors do not give legal or tax advice. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor.

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