When you own and operate a business, your Buy-Sell Agreement is probably the last thing on your mind. It’s something your business attorney drafted years ago and most likely you have not thought about it since. Or, maybe you don’t have one at all! Just like your personal estate planning, having an estate plan for your business is very important. Without a buy-sell agreement, a closely held or family business faces the possibility of financial and tax problems on an owner’s death, disability, divorce, bankruptcy, sale or retirement. The benefits of having a buy-sell agreement in place far outweigh the cost of creating and maintaining the agreement. A buy-sell agreement can ward off infighting by family members, co-owners and spouses. The buy-sell agreement can also help keep the business afloat in the event of one of these major life events.
A buy-sell agreement is good for any business entity, including corporations, partnerships, LLCs and even sole proprietorships. Let’s say you and your business partner, David, run an ice cream shop as 50/50 partners. Your partnership is based on a mere handshake. David dies. Do you still have a business? Is David’s spouse or child your new partner? Do you have the right or the obligation to buy them out? If so, for how much and under what terms? What happens if you die instead of David? The most basic business needs a buy-sell agreement. It’s the business owners’ opportunity to set forth in black and white the expectations of the owners when a life crisis occurs.
One type of buy-sell agreement is a cross-purchase agreement. With a cross-purchase agreement if you or David die, become disabled, etc. one owner can buy out the other owner’s share. A different type of buy-sell is a redemption agreement. With this style of agreement, the business itself would make the purchase of the share of the owner experiencing the life crisis so the other owner or owners do not have to individually finance the purchase. Both types of agreements allow for flexibility. It’s up to the owners of the business to work out what works best for them.
Insurance is often a factor in many buy-sell agreements. Insurance can ensure there is cash available upon an owner’s life crisis generally death or disability. For example, if you or David dies, a life insurance policy on each of you can fund a buyout of the deceased owner’s share of the business. Now, the ice cream shop continues uninterrupted and the surviving spouse and/or heirs of the decedent are reimbursed for the value of the business as agreed.
The difficult decisions which must be addressed in order to create a buy-sell agreement can often seem complex and overwhelming. But, in almost all cases it is better to have something in place than nothing at all. You will want to work with an attorney who has experience with buy-sell agreements to help you understand the issues you need to address in your buy-sell agreement. For more information about creating or updating a buy-sell agreement for your business please contact The Law Offices of Hoyt & Bryan, LLC at (407)977-8080 or visit HoytBryan.com.
About the Author: Peggy Hoyt Peggy R. Hoyt practices in the areas of family wealth and legacy counselling, including trust and estate planning and administration, elder law, small business creation, succession and exit planning, real estate transactions and animal law.