Buy-Sell Agreement

Every Business Needs One

A business interest is typically the single largest asset of a Business Owner.

What is a buy-sell agreement?

  • A buy-sell is an agreement that establishes a Plan and a Business Value between the Business Owners of a business which details what is to occur upon the death of one of the Business Owners. (Can also deal with the situation where one of the Business Owners becomes disabled, bankrupts, retires, divorces, or wishes to sell their interest in the business.)
  • When is a buy-sell agreement needed or useful?

  • A buy-sell agreement is a necessity if a business (including a professional practice) is owned by more than one person.
  • Also works between a single Business Owner and key employees.
  • A properly drawn, valued and funded buy-sell agreement can prevent a disaster, such as a forced sale or years in court.
  • What does a buy-sell agreement do?

  • Overall, the buy-sell agreement gives everyone comfort and security that they will receive maximum benefit from the business that they worked a lifetime to establish. Some of the other specific benefits include:
    1. Provides that the surviving Business Owner will purchase the deceased or withdrawing Business Owner’s share of the operation.
    2. Provides funds to hire a replacement for the deceased employee.
    3. Provides funds to the widow or widower to replace the salary of the deceased.
    4. Provides assurance to the surviving Business Owners that the business will continue in a successful manner, while providing the deceased Business Owner’s heirs with funds that will enable them to meet their needs and pay estate administration costs.
    5. Prevents an untimely forced sale.
    6. Sets forth the purchase price and how it is determined based on a pre-agreed to Business Valuation methodology.
    7. Creates a mechanism for providing the funds needed to make the purchase. One way to handle the problem is to require the purchase of life insurance. To meet this need, a "first to die" policy which pays a death benefit on death of the first Business Owner, thereby ensuring that funds are available for the buy-out regardless of which Business Owner partner dies first.
    8. Allows the survivor a smooth transition, and the deceased Business Owner’s family its fair share of the value of the business.
    9. Allows for the continuation of the profitable business under such circumstances.
  • Having the Business Owner partners agree to the Business Valuation for the purchase price while they are alive, healthy, and friendly is invaluable and gets them started on the right course.

  • A professional Business Valuation, rather than a mere valuation formula will ease the transition.
  • A buy-sell agreement avoids the problem of first valuing a business at the time of sale which could result in co-owners seizing on different valuation formulas, which can produce very different results.
  • Agreeing on a way to value the company in advance through a buy-sell or buyout agreement gives Business Owners the chance to discuss and vote on how a reasonable price for the company should be calculated.
  • A sound agreed-to Business Valuation goes a long way to reducing conflict when the time for a buyout comes. The Business Valuation can be periodically updated.

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