Buy-sell agreements: A smart business decision also makes estate planning sense

September 14, 2020

Do you own a business with one or more individuals? Undoubtedly, your interest in the business represents a substantial part of your net worth and is likely your “pride and joy.” So it’s normal if your fondest wish is for the business to continue long after you’re gone or for you to keep it running if a co-owner or partner dies.

However, if you do not make adequate provisions, the business may flounder if a leadership void isn’t filled. Or bitter family disputes may tear the organization apart. In the end, a “distress sale” may leave your heirs with substantially less than the company’s current value.

Fortunately, if you have a buy-sell agreement drafted during your lifetime, you can avoid disastrous results. The agreement can dictate how the business is sold, to whom and for how much. You can use life insurance policies to fund the transaction.

Buy-sell agreements in a nutshell

You may use a buy-sell agreement for virtually every type of business entity. They work for C corporations, S corporations, partnerships, and limited liability companies. Typically, it applies to the shares of stock and any business real estate respective owners hold.

Although variations exist, the agreement essentially provides for the sale of a business interest to other owners or partners, the business entity itself, or a hybrid. Alternatively, the agreement may cover a sale to one or more long-time employees.

The agreement, which all affected parties typically sign, imposes restrictions on the future sale of the business or property. For instance, if you intend to leave a business interest to your children, you may provide for each child to sell or transfer his or her interest to another party or parties named in the agreement, such as grandchildren or other relatives.

Significantly, a buy-sell agreement often establishes a formula for determining the sale price of the business and its components. The formula may be based on financial statement figures, such as book value, adjusted book value, or the weighted average of historical earnings, or a combination of variables.

Understanding the benefits

Having a valid buy-sell agreement in writing removes much of the uncertainty the death of an owner causes. It provides a “ready, willing and able” buyer who’s arranged to purchase shares under the formula or at a fixed price. There’s no argument about what the business is worth among co-owners, partners or family members.

The buy-sell agreement addresses a host of problems about co-ownership of assets. For instance, if you have one partner who dies first, the partnership shares might pass to a family member who has a different vision for the future than you do.

Work with us to design a buy-sell agreement that helps preserve the value of your business for your family.