Issue link: http://read.dmtmag.com/i/764739
w w w. v w m m e d i a . c o m J a n - F e b 2 017 | V I N E YA R D & W I N E RY M A N A G E M E N T 6 7 er's departure or death, but unless that buy-sell agreement is funded, it's unlikely to be executed suc- cessfully. For example, a winery owned and operated by a sister and broth- er may have a buy-sell agreement stating that if one dies, ownership goes to the other — but how will the sister buy out the deceased brother's shares? This is a com- mon trouble spot in buy-sell agree- ments. There are a number of ways to fund a buy-sell agreement, each with its own pros and cons. Create a sinking fund. The business diverts a portion of its revenue into a savings account so liquid assets are available to buy the shares of an owner who leaves the business or passes away. T h i s p r o v i d e s l i q u i d i t y w h e n needed, but diverts a substantial amount of revenue away from busi- ness operations, potentially ham- pering growth. provides the necessary liquidity with the least stress on revenue. However, owners should take the time to do a careful analysis to determine the appropriate funding method for their business. FUNDING A BUY-SELL WITH LIFE INSURANCE There are different types of life insurance, and one size doesn't fit all. Owners and businesses must look to their desired goals when determining what type of insurance is most appropriate for them. Will the owners retire or will the business be sold to a third party in the future? If either of these situ- ations is a possibility, then term insurance may be the best option because there's a specified period during which the need to fund a buyout exists. Wineries are often multigenerational, with the owners playing an integral role in its contin- Promissory note. Ownership interests pass into the deceased's estate, and the business or surviv- ing owner purchases the deceased owner's share from the estate through installment payments, which should include interest. These payments are easier to man- age financially, but the business must record a liability on its books, and the winery must still generate sufficient cash flow to maintain its operations and pay on the note. Use life insurance. If death is the triggering event, life insurance provides the cash to fund a buyout when needed. However, the fea- sibility of this funding mechanism depends on the owners' insurabil- ity. Using life insurance to fund a buy-sell agreement is a simple and elegant solution, but it may not be right for every business or owner. Wineries are often highly lever- aged and heavily capitalized. With this in mind, life insurance typically