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Buy-Sell Agreement
As a business owner, protecting the longevity of your company is an important part of your financial plan. While business partners usually believe they will be in business together well into the future, this is not always the case. There are numerous situations that can impact the success of your business, which deserve serious consideration.
Buy-sell agreements very often are the answer for business owners as a way to establish a source of cash to ensure funds are available when needed. A buy-sell agreement addresses death, disability and retirement of one of the owners, as well as disagreements about ownership and operation of the business that can arise when an owner wants to exit the partnership. The agreement often includes a formula or process for valuing the business to simplify the buy-out of an owner.
Your business can be seriously disrupted if one partner dies, or leaves due to permanent disability, retirement, bankruptcy, divorce or an unresolved dispute between business owners and shareholders. If your business loses an owner, the remaining partners must decide how the business will continue. You generally have four options to consider:
- Close down the business - after all the time, energy and money invested, this may not be a practical option
- Continue the business with a new partner (i.e., spouse of the deceased)
- Sell your shares - who will buy them and at what price?
- Purchase the shares from the deceased owner's estate
A buy-sell agreement is a contract among business owners. At the event that one of the owners dies or cannot work anymore, his share in the business is transferred according to the terms of the buy-sell agreement. The other owner(s) are obligated to purchase the deceased's business interest and the deceased's heirs are obligated to sell.
Let`s look at the benefits of a buy-sell agreement:
For the heirs:
- They won`t have to worry about running a business that they do not know or do not want to run
- They will receive a fair prove for the sale of their family business interest
- They will avoid delays associated with probate
For the surviving shareholders:
- They will know the purchase price of the business beforehand
- They will not have to worry about new partners