Considerations For Establishing A Buy/Sell Agreement

When a business is ran by two or more owners, it’s a good idea for the owners to set up a buy/sell agreement in order to formally establish what is going to happen to the business if an owner passes away, becomes disabled or just decides to leave the business.

Not establishing such an agreement can have negative consequences for the future, possibly harming both the business and the future of its owners. 

Insurance 

Insurance almost always plays a major part in buy/sell agreements. In most cases, life insurance policies will be taken out on each individual owner, with the other owners listed as the beneficiaries on the policies. 

This is so existing owners will have enough money to pay for the ownership interest of the deceased owner. If life insurance policies aren’t taken out and an owner dies, the other owners will have to buy out their portion of the business with either the business’s money or their own money, and if provisions are not set in place to do it over time, the business cash flow and operating capital will be put under a lot of pressure. 

Reasons to Activate the Agreement 

All buy/sell agreement have events that must be designated to which will cause the agreement to be activated. In a lot of cases, these events can be death, resignation, disability, and inability to carry out responsibilities as agreed upon. 

There is a great deal of variation and distinction possible when it comes to what these reasons are. Due to this, you should consider utilizing the services of a business attorney. They will be able to draft your agreement in legal language which will help to provide the surviving business owners with some options to address the situations. 

Purchase Price 

When setting up a buy/sell agreement, establishing a purchase price is vital. This is the price that the remaining owners will be required to pay a departing owner after they have left the company or passed away.

The price needs to be fair for both the departing owner or their estate, and to the remaining owners. When you figure out a price, also make sure to work out the terms of payment as well. It would be best to do this sooner than later and when none of the owners are thinking of leaving. 

There are multiple factors that can affect the chosen purchase price and other terms over time. To settle on reasonable buy-sell provisions, you should think about speaking with a business attorney to help you out. 

Taxes 

Don’t be surprised, but there are tax issues that come with buy/sell agreements. These tax issues can be somewhat complicated, regardless of whether a buy/sell agreement is being funded by a life insurance policy or not. Also, the relevant taxes are not only income taxes, but estate taxes as well.

To get familiar with the distinctions of a buy/sell agreement, including tax issues, you should consider working with a qualified business attorney. They will be able to help you through all of the specifics, ensuring that all of your goals are met. 

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