What is a Buy-Sell Agreement?
A buy-sell agreement is the agreement between co-owners of a business that governs the situation if one of the co-owners dies or otherwise leaves the business. Every co-owned business needs a buy-sell agreement as soon as the business is formed or shortly thereafter. Without a business continuation plan you could face numerous problems due to death or disability of one of the owners. A buy-sell agreement can ward off friction between family members, remaining co-owners and spouses. It’s crucial during times of transition that the value of the businesses good-will is kept in-tact. A major asset of any business is the favorable reputation the business has built up over the years. A buy-sell agreement is perhaps the most important document that a business can have.
What types of Businesses Should Consider Business Continuation and Succession Planning?
It makes sense for any business to have a buy-sell. That includes sole proprietorships, partnerships, corporations and LLCs. There can be a lot of issues with all of these types of businesses. Without proper planning forced dissolution, survivors accepting heirs in the business and the sale of a good business at bargain-basement prices are all potential issues on the table.
Items that should be addressed in a valid Buy-Sell Agreement
An appropriate course of action for the following risks should be contingencies in the agreement:
- Termination of Employment
- Valuation Method
- First Right of Refusal
- Possible Terms of Finance
Way to Fund a Buy-Sell
- Personal Funds – most successful business owners do not have large sums of liquid assets. Many times they have their money “working” in the business.
- Sinking Funds – this may be inadequate if death is premature. An investment of this nature may also be subject to tax on growth and subject to claim by creditors.
- Borrowed Funds – Loss of a key person may impair credit options.
- Installment Payments to Heirs – Good idea but the business if the business fails payment to heirs may be difficult.
- Life Insurance – Financing is guaranteed. Proceeds are income tax free. Cash values can be used for buy-out due to retirement or disability. This is a very economical method.
Work with your team
Enlist your attorney and insurance agent during the planning and implementation process. You’ll need a business or tax attorney experienced in buy-sell to help design a plan that is right for your business. Your insurance agent can help you put the right life insurance in place to finance the agreement. Let our team at Knapp Tedesco Insurance help you with the insurance today! Call us at 515-232-7060.