The Basics of Buy-Sell Agreements
A buy-sell agreement provides a clear and legally binding approach for dividing up a business in the event that you or one of your partners are incapacitated. A buy-sell agreement determines the circumstances under which business interests can be sold, exactly who can purchase them, and the cost of buying up the deceased or incapacitated partner's business interest. Usually, this is used to ensure a quick and uninterrupted transfer of power to the business partners. In a sole proprietorship, a high-ranking employee or family member can be named to be the buyer and successor.
The ultimate goal of a buy-sell agreement is to continue the smooth operation of a business so it's important that the funds are available when needed. Buy-sell agreements can be funded in many ways and one of the most effective tactics is for partners to take out life insurance policies on one another. In the event of death, the life insurance payout is then used to pay for the ownership interest in the business. Some other options for funding a buy-sell agreement are:
- Cash sinking funds
- Bank loans
- Installment payouts
The above methods are not always the most reliable. It can be difficult to predict how much cash will be needed in the event of a sudden death or departure and there is no guarantee a bank will be willing to loan you money after losing a valuable asset.
How Does a Buy-Sell Agreement Secure Your Business?
Without a proper plan in place, your business could quickly spin into turmoil upon the incapacitation of you or a business partner. If there are multiple partners does one get controlling interest or is it to be divided up evenly? If there is no partner, does a family member get control or does it go to a high-ranking employee? These kinds of decisions are not easy to make in a time of crisis and infighting over who gets what can cause disruption in operations and lead to lengthy court battles or the dissolution of the business entirely.
In addition, even if everyone is on the same page the vacuum left by the sudden departure of an owner can cause instability in business operations and shake the confidence of shareholders and consumers. It is in everyone's best interest to avoid disruption by quickly and effectively resolving this. Issues like these are exactly why businesses should have a buy-sell agreement in place.
Buy-sell agreements can become quite complicated, and what works for one business may not work for another. At Summerlin-Roberts we work closely with you to draft an agreement that meets your needs and works within the constraints of your budget. For more information on creating a buy-sell agreement that protects your business contact Summerlin-Roberts today.