A buy-sell agreement is a contract between business owners with the purpose of transferring an owner’s interest upon the occurrence of a specific event, usually death. It assures a smooth transition of the business interest (which may be a partnership, corporation or LLC for example) to the remaining business owners.
If a business owner dies without a buy-sell agreement in place, problems may arise. The decedent’s heirs may end up inheriting the business interest; it may be a business they know nothing about or have no desire to be a part of. The heirs may also fail to get along with the other owners or they may have conflicting financial needs, thereby causing disputes over whether to take money out of the business (e.g., as a dividend or as compensation) or to leave money in the business for business needs.
A buy-sell agreement may avoid these problems by providing a plan which includes, among other things, an agreed sale price for the business interest. The sale price is commonly determined either by a formula to be used at death or by a predetermined price established at the time the buy-sell agreement is entered into and periodically revised by the parties.
There are several ways to structure a buy-sell. Either the business itself or the remaining owners can be required to purchase the deceased owner’s interest. Further, life insurance may be used to provide the funds necessary to make the required purchase.
Although a buy-sell agreement may not seem like a high priority for a newly formed business, it should be. The benefits of a plan to transfer interests in a business at the death of an owner can prove to be invaluable to the family and to the future of the business. Please contact us if you would like to explore how a buy-sell agreement can work for you.
— Leslie Heffernen