Sudden events can cripple a small business.
One way to protect the business from such an event involving one of the owners is a tool called a buy-sell agreement. A properly constructed buy-sell agreement allows the business to continue operations should something catastrophic happen to the owner, or even if the owner decides to retire. A buy-sell agreement is a legal contract that provides funding for the future sale of your business interest when an event is triggered.
Events that can trigger a buy-sell agreement include death of an owner, long-term disability, retirement and divorce. The buy-sell agreement immediately provides a buyer’s interest, and sets the triggers that can prompt a change in ownership. The buyers can be other people, or an entity, and there can be more than one buyer.
There are two common forms of agreements: In a cross-purchase agreement, the remaining owners purchase the share of the business that is for sale. In a redemption agreement, the business entity buys the share of the business. Some partners opt for a mix of the two, with some portions available for purchase by individual partners and the remainder bought by the partnership.
In order to ensure that funds are available, partners in a business commonly purchase life insurance policies on the other partners. In the event of a death, the proceeds from the policy will be used towards the purchase of the deceased’s business interest.
A buy-sell agreement is an important strategy to make sure a business continues if something happens to the owner. To schedule your no-cost consultation to find out how we help businesses just like yours every day, click the link at the bottom of this video page.