Do You Have a Business Partner? If So You Need A Buy-Sell Agreement!
A buy-sell agreement is a critical component of any businesses continuation plan. This becomes especially true if the business has more than one founder or has recently brought additional “key stakeholders” into the business. If you own all or part of a business—any business—you should know about buy-sell agreements. Unless you plan to be lucky forever, you’d better have one. Without it, a closely held or family business faces a world of financial and tax problems on an owner’s death, incapacitation, divorce, bankruptcy, sale or retirement.
The cost of a buy-sell is tiny compared to its benefits. A buy-sell agreement can ward off infighting by family members, co-owners and spouses, keep the business afloat, so its goodwill and customer base remain intact, and avoid liquidity problems that often arise on these major events.
Any Type of Business.
A buy-sell agreement makes sense for any business entity, including corporations, partnerships, LLCs and even proprietorships. How much you need a buy-sell depends on how many owners there are and who else might be waiting in the wings with a financial stake in the business.
Example: You and your partner Joe run a hotdog stand as 50/50 partners. You might have a written agreement or a mere handshake. Joe dies. Do you still have a business? Is Joe’s wife or child your new partner? Do you have the right or the obligation to buy them out? If so, for how much and on what terms? Can you strike out on your own with your own hotdog stand, or are you stuck with the baggage of the old one? What if you die instead of Joe?
As this example shows, the most basic business can benefit from a buy-sell, even if it’s the only written document the business has. Disputes and confusion can result without one even in a small business, and the stakes go up with larger and more complex businesses. You can have a buy-sell agreement with two owners or with many. Suppose you have ten owners in a family company and someone tries to transfer their shares to a competitor? Such events are easy to prevent with a buy-sell but very expensive otherwise.
Cross Purchase vs. Redemption.
One type of agreement is a cross-purchase: If you or Joe dies, becomes disabled, goes bankrupt, etc., the other can buy his share. With a redemption style agreement, the business itself would make the purchase so the owners don’t individually go out of pocket.
With either type of buy-sell, there’s lots of flexibility. The price might be fixed, determined by appraisal or formula. The price might be paid in cash or installments over time. There can be different terms for different events, one price and terms for retirement, one for disability, one for death.
Insurance features prominently in many buy-sell agreements. You don’t have to use insurance, but it can ensure there’s cash available when the time comes. For example, whether you or Joe dies first, a life insurance policy on each of you can fund the buyout so your hot dog stands stays afloat and so spouse/heirs are bought out as agreed.
Good for the Goose and Gander.
You may find it difficult to face these issues and to make some of the myriad decisions. But just about any buy-sell agreement is better than none. Besides, one of the beauties of the process is that buy-sell agreements are reciprocal. No one knows for sure if you or Joe will be the first to go by death, disability, retirement, etc. That reciprocal nature makes negotiating and agreeing on these issues easier than you might think.
Most often times a business owner or partner realizes they need a Buy-Sell Agreement when it’s too late. What does “too late” mean exactly? Well from my experience often times business owners are busy growing their business, then they find out they have a serious illness, or they may be their partner has an illness or is getting divorced. In these situations, and there are many situations that can trigger a “buy-sell agreement” it’s often times too late to get the buy-sell agreement in-place in a favorable manner to all parties involved. A buy-sell agreement often involves purchasing “life insurance” on a partner or key stakeholder, and if the partner has an illness or disability, it can become difficult if not impossible to implement a buy-sell agreement at that point.
Get Some Help.
You’ll need an experienced insurance agent that specializes in buy-sell agreements and attorney who is also experienced in buy-sell agreements to help you draft the agreement. But these agreements can be surprisingly simple and may cost as little as a few thousand dollars. Whatever you spend on a buy-sell, it will be a drop in the bucket compared to what it can save you.
Utah Insurance Solutions specializes in helping business owners implement Buy-Sell Agreements, and Key-Man life insurance policies.