For businesses with more than one owner, the importance of a buy-sell
agreement cannot be overstated. Events such as the death, incapacity,
retirement or even divorce of one of the owners (“Triggering Events”)
can sink a business if the owners have not entered into a buy-sell
agreement. Unfortunately, most small business owners do not have this
vital agreement in place.
Many concerns arise when there is an unforeseen change in ownership.
For the remaining owners, the most common concerns are 1) being forced
to work with the departing owner’s successors, who may have potentially
conflicting ideas; and 2) finding a source of capital to fund a
significant buyout. And for the departing owner, the primary concerns
are 1) ensuring his or her family is compensated fairly for their share
of the business; and 2) providing funding for the family to pay
potential estate taxes. A properly drafted buy-sell agreement can
address each of these concerns.
Among other things, a buy-sell agreement can accomplish the following:
┐ Upon the occurrence of one of the above mentioned Triggering Events,
owners are guaranteed their interest in the business will be purchased.
A buy-sell agreement can also provide for optional buy-outs when a
member wants to retire, wants to sell their ownership interest to a
third party, declares bankruptcy, or has a court order affecting his or
her ownership interest in the company.
┐ Provide that the departing or departed owner’s interest must be sold
to the company, to the remaining owners, or a combination of the two;
┐ Provide a mechanism whereby the purchase price may be determined by agreement amongst the owners
or by market conditions;
┐ Provide a funding source, primarily through insurance policies, so
that the company can maintain its cash flow and the departing member’s
family can be compensated fairly; and
┐ Establish a valuation of a deceased owner’s interest in the business for estate tax
Executing a carefully planned buy sell agreement can assure business
owners that their ownership interest in their business is secure,
regardless of any unforeseen circumstances. In many cases, this can be
accomplished without putting excessive strain on the business’s cash
flow, ensuring that the business and its remaining owners continue to
succeed as well.
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