Events like the retirement or passing of an owner don’t have to mean the end of a business. Business succession planning provides an opportunity for a smooth ownership transition. One tool used in business succession planning is the buy-sell agreement. In this blog, we’ll provide an overview of buy-sell agreements and how they can benefit business owners.
What Is a Buy-Sell Agreement?
A buy and sell agreement (or buy-sell agreement) is a legal contract that sets a plan for how a partner’s share of a business may be reassigned if they exit the business. The buy-sell agreement often rules that the available shares be sold to the remaining partners.
What Are the Benefits of a Buy-Sell Agreement?
A buy-sell agreement assures a smooth transition of ownership and business continuity in the event of a departure of a partner or large equity owner. The absence of an agreement can lead to lengthy, expensive legal battles and contestation.
A properly designed buy-sell agreement protects your heirs by eliminating the possibility of a forced sale or the need for your family to rely on the business for income. The buyer and sale prices are prearranged under the buy-sell agreement. Having an agreement in place makes sure surviving spouses or children don’t have to deal with probate court.
Types of Buy-Sell Agreements
There are two types of buy-sell agreements:
Cross-purchase agreement: the remaining owners or partners purchase the share of the business for sale.
Entity-purchase agreement: the business entity buys the deceased’s share of the business.
A wait-and-see agreement blends both types. The agreement will become either one or the other depending on what’s best for business continuity when the time is right. Additionally, when a sole proprietor dies, a key employee may be designated as the buyer or successor.
Who Needs a Buy-Sell Agreement?
Business owners should consider this contract in these cases:
There are two or more owners
To provide protection in the event of any owner’s termination of employment, retirement, divorce, disability, or death
To establish an orderly transfer of any owner’s business interest
What Is Included in a Buy and Sell Agreement?
When creating a buy-sell agreement, include the following information:
Triggering buyout events, such as death, permanent disability, bankruptcy or retirement.
All partners or owners involved and their current equity stakes.
A recent valuation of the company’s overall equity.
A funding instrument, such as life insurance policies.
Tax and estate planning considerations for the individual partners and surviving beneficiaries.
How A Business Broker Can Assist You
If you’re considering buying or selling a business, Global Business Brokerage is here to guide you through the process. From handling negotiations to ensuring you have all the right paperwork, we’ll prepare you for the next chapter. Schedule a consultation with us.
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