To avoid the instability that comes with a business losing a key member, you need a plan in place. One that's legally binding. That's where buy-sell agreements come in.
What Is A Buy-Sell Agreement?
The core of a buy-sell agreement is not that difficult to understand. It's simply a legally binding agreement on what to do if a co-owner or shareholder of your business leaves or is incapacitated. Buy-sell agreements are most commonly triggered by events such as:
The Purpose Of A Buy-Sell Agreement
Buy-sell agreements provide a legally binding framework for dividing up a business when a key member leaves. They determine the circumstances when business interests should be sold and lay out the cost of buying up the departing member's share. Figuring all of this out takes time and you'll probably have to do some negotiation. When your business is in crisis-mode time is hard to come by and negotiations can get heated. With a buy-sell agreement all of the hard work is done upfront while you're in a stable position, thus ensuring your business stays secure.
Why Is This So Important?
Even in the best case scenario the departure of an owner can cause instability in business operations, which doesn't look good to your shareholders or the consumers. It's much better for everyone involved if situations like these are settled quickly and neatly. This is why having a buy-sell agreement in place is important for businesses of all sizes. Buy-sell agreements are only as good as their funding, however. The money to buy up the business interest needs to be there when the agreement is triggered.
There Are Many Ways To Fund A Buy-Sell Agreement
It's generally recommended that you fund your buy-sell agreement with life insurance. It's the most effective way of doing it and it practically guarantees the money will be there when you need it. Life insurance isn't the only method though, and depending on how your business is structured other options might end up being better. Some other ways you can fund buy-sell agreements are:
- Putting money into a cash sinking fund
- Getting a business loan
- Selling off assets
Each of these methods have their pros and cons. If you're a small or midsize business with good cash flow a sinking fund might be your best bet, but getting a business loan or selling assets during a crisis would probably be out of the question. If you're a larger business with tighter margins and more assets a cash fund would probably be insufficient, but you could reasonably expect to get a loan or sell off some assets.
Between all the legal jargon and figuring out the most cost-effective funding method, buy-sell agreements can become quite complicated. At Summerlin-Roberts we can work alongside you to draft an airtight agreement that is tailored to your needs . We can also help you set up a funding source that will be there when the time comes. Please contact us at Summerlin-Roberts today for more information on buy-sell agreements and why your business should have one.