Have you ever thought what would happen to your business if something unforeseen happens to you? A buy-sell agreement needs to be in place to avoid tax and financial problem in case of owner’s death, bankruptcy, divorce, incapacitation, sale or retirement.
This type of legal document is also referred to as a business continuation plan, a buyout agreement or a stock purchase agreement.
A buy-sell agreement makes sense for any and all business entity, including partnerships, LLCs, corporations and even sole proprietorships. How much you need a buy-sell agreement depends on how many owners there are and who else may have a financial interest in the business. The cost of a buy-sell agreement is minuscule compared to its benefits. A buy-sell agreement can ward off ill feelings by family members, co-owners and spouses. It will also keep the business stable so it’s goodwill and customer base remain intact, as well as avoiding liquidity problems that often arise on these major events.
There are a couple types of agreements. The first is called a cross-purchase. This guarantees the party to buy the shares of the person concerned. There is also a redemption style agreement, whereas the business itself would make the purchase and bypass the individuals altogether. A feature that is used in conjunction is a life insurance policy on each owner. This would ensure the availability of cash if and when the occasion presents itself. Thus, providing funding for the buy-out . Another type is an agreement between the company and the business owners or partners whereby the owners agree to sell the owner’s interest back to the company should the occasion arise.
There are all forms of flexibility. A formula may be determined, appraisal or a set as a fixed price. There may be installments made over time or all cash up front. There can also be various terms for different events, such as one for disability, one for retirement or one for death.
Although, making these decisions may be difficult, keep in mind that they are reciprocal for each. The agreements can also be simple, but must be structured property to insure its effectiveness.