BUY-SELL AGREEMENT
What is a Buy-Sell Agreement? A Buy-Sell Agreement is an arrangement between partners agreeing to purchase the shares of another partner upon his/her death, disability, or retirement. The agreement sets the price or a method to determine value and provides for a method of financing the purchase. Anyone who is a partner in a business or a major shareholder in a company should seriously consider a Buy-Sell Agreement.
How is a Buy-Sell Agreement financed? A Buy-Sell Agreement can be financed in several ways.
- Business Profits can be used to pay your partner or the heirs in a lump sum, or by making regular payments. The disadvantages are that the payments are not tax-deductible and it creates a situation whereby your partner or the heirs have to wait for their cash
- Loans can be used to finance a Buy-Sell Agreement but it increases the operating risk of the business
- Life Insurance can provide immediate funds to the surviving partners to buy out the deceased or disabled partner. One option is to purchase a life insurance policy on the life of each co-owner or partner. Another option is that the business purchases insurance on the life of each co-owner or partner and uses the insurance proceeds to purchase or redeem the deceased's interest in the business. The advantages to using Life Insurance to finance a Buy-Sell Agreement is that the heirs have a definitive value for the deceased partner's interest, the surviving partners have total and unrestricted ownership of the business, and the longer the policy is in force, the greater the cash surrender value, which can be used to take advantage of other business opportunities
Why do I need a Buy-Sell Agreement? What will happen if one of your business partners or shareholders dies prematurely, decides to retire, or becomes disabled and can no longer work? Potentially, the viability of your business could be in jeopardy. A Buy-Sell Agreement can help protect all partners, and ensure business continuity.
What are the advantages of a Buy-Sell Agreement?
- It ensures a market for private company shares
- It can create full and immediate ownership of the business
- It can help to provide full value of the heirs' interest in the business
- It can provide business continuity
Contact the Blevins Team for more information.
