Buy-Sell Agreements

A buy-sell agreement is a plan that predetermines buyout value and procedures in the event of death, disability, disputes, financial difficulties or the planned departure of an owner. How well prepared business owners are for unplanned or planned changes in leadership or ownership will determine how well the family, partners and employees, as well as the business, will survive the changes.

For the unprepared, events such as disability, death, a prolonged downturn in the economy or the departure of a partner can result in unpleasant circumstances for family, partners and employees. For the prepared, such events will set their plan into action for the protection of heirs or partners and continuation of the business.

Creating a Buy-Sell Agreement will help answer these questions.

1. Does the company have a succession plan for continuity in leadership and ownership?

2. What is the value of the business?

3. What is a fair compensation for each partner’s contribution to the business?

4. Are there sufficient cash reserves to carry the company through changes in leadership or ownership?

5. Can the business endure the financial burden of borrowing money or making installment payments from the cash flow and still operate efficiently?

6. Is there a funding mechanism to provide sufficient cash if an owner should die or other circumstances require a buyout?

7. Who are the decision makers and professionals who will assist with implementing the agreement at the time of need?

A fully funded buy-sell agreement can:

• Predetermine the price at which the buyer agrees to purchase, and the owner agrees to sell, their interests in the business.
• Create a market for each owner’s share of the business.
• Provide money to fund the plan at the exact time it is needed.
• Establish the business’ value for estate tax purposes.

Advantages during the life of the owner:

• For all business owners: A funded buy-sell agreement gives business owners the peace of mind that comes from planning for their and their families’ financial security.
• For creditors, suppliers, and customers: A funded buy-sell agreement helps to assure such people that the death or disability of a business owner will not disrupt the day-to-day operations of that business.
• For employees of the business: Buy-sell planning provides employees with a sense of security that comes from business continuity.

Advantages after the owner’s death, disability or retirement:

• For all continuing business owners: A fully funded buy-sell agreement gives surviving owners or the business the opportunity and the cash to purchase a departing owner’s business interest at a fair price.
• For the owner’s family: A fully funded buy-sell agreement guarantees that the families of the owner will receive a fair price for their business interest.