What will happen to my business in the event of my death, disability or retirement?
How will my family or I get money out of the business?
To what extent will my children be involved in the business? Who will run it?
Are the key managers adequately insured?
If I sell the business, how should the sale be structured?
Many of the problems facing a business owner can be avoided, or at least mitigated, by proper planning.
Our role is to help the business owners and professionals recognize these problems and to assist them in formulating plans that are appropriate for their special and unique needs.
Buy Sell Agreement
A buy-sell agreement is a written contractual obligation entered into by two or more parties, which are usually the co-owners of a business. This agreement sets out the terms and conditions under which one or more parties will BUY the other’s business interest, and the terms and conditions under which this business interest will be SOLD.
In other words, this is like a ‘business will’ for the business partners and/or shareholders to protect their business interests.
The implementation of this agreement does not happen immediately. Rather, it is triggered by a future happening, such as the death, permanent disability or retirement of one of the co-owners or shareholders of the business.
There are three main components to a Buy-Sell Agreement:
|Those that are purchasing the business interests of a departing partner or shareholder (usually the remaining owners/shareholders)
|Which events will trigger the implementation of the agreement (usually the death, disability or retirement of one of the owners or shareholders)
|The price the remaining owners/shareholders will pay for the departing individual’s business interest
The Buy-Sell Agreement is the most important aspect of any business succession plan and must be adequately funded in order to ensure its proper execution.
Buy Sell Funding
The business interest often accounts for a substantial portion of the wealth that a business owner has accumulated. By ensuring that there is a plan in place for the eventual transfer of this business interest will help the business and its remaining owners survive the transition.
The integral part of any succession plan is to make sure that the financing is in place in order to fund the purchase and sale of the business interest if one of the owners/shareholders dies. Such a plan should also provide the business owners with sufficient liquid funds in order to pay for the related income taxes associated with purchasing the business interest of the deceased.
The funding for a Buy-Sell Agreement is most commonly done through insurance. Life Insurance is purchased by owners/shareholders on the lives of their partners. Therefore, if/when one of the owners/shareholders dies, the proceeds received from the life insurance policy can be used to fund the obligation that results from the buy-sell agreement.
Another option for funding is Disability Insurance, which works the same way as the Life Insurance. When the co-owners/shareholders have Disability Insurance policies purchased on each others’ lives, then they will receive the funds needed to purchase the disabled partner’s business interest and prevent outsiders from interfering in the business.
Know more about Disability Insurance
Purposes And Advantages Of A Buy-Sell Agreement
There are many benefits to a buy-sell agreement and with the proper funding in place these agreements can easily be put into place.
- Buy-Sell Agreements provide a guaranteed market for the business interest. This means that there is a guarantee that the owner of the business interest will sell it, and a guarantee that the other party(ies) to the agreement will purchase that interest.
- There is a guarantee as to when the transaction will occur, and at what price.
- A deceased business owner’s estate will be provided with cash within a few months of the business owner’s death to pay legacies, taxes and other estate costs.
- These agreements assure surviving business owner(s) that no unwanted or unexpected outsiders will enter into the business, either by inheriting or by purchasing the deceased’s business interest. Furthermore, it keeps executors and heirs from interfering in business affairs.
- The business will continue smoothly and the careers of the owners and employees will not be interrupted.
- The business will be a better credit risk since its probability of continuation after the death of an owner is enhanced.