If you own a business and you want to see that business survive even after your death, you need a succession plan. And, if your business is co-owned, part of that succession plan should be a Buy-Sell Agreement.
What is a Buy-Sell Agreement?
A Buy-Sell Agreement is a contract that you and your co-owners enter into, while you’re all still alive and well – preferably when your business is established. The Agreement sets forth when an owner can sell his or her interest in the company, to whom the interest can be sold, and how much that interest would cost. Alternatively, the Agreement might set forth an agreed-upon formula or method for reaching a purchase price at the appropriate time.
Why Use a Buy-Sell Agreement?
Buy-Sell Agreements can cover a multitude of situations, like the divorce or bankruptcy of a co-owner, or just his or her desire to leave the company. But they’re especially useful when it comes to the death or disability of a co-owner. This is, by its nature, a stressful time for all parties involved. Having an Agreement in place that dictates how the deceased owner’s business interest will be handled, and at what price, can eliminate unnecessary strain and conflict.
What About Coming Up With the Money?
Aside from determining the price of an owner’s interest, one of the most important features of a Buy-Sell Agreement is the terms that control how that price is paid when the time comes for a deceased or disabled owner’s interest to be paid. Some business owners include flexible payment terms in their Agreements, so that the remaining owners won’t be left scrambling to come up with the necessary capital. Other business owners use life insurance policies to fund Buy-Sell Agreements.
Your estate planning attorney can help you establish an effective Buy-Sell Agreement as part of your company’s overall succession plan.