Establish a Plan and a Business Value between the Business Owners of a business that details what is to occur upon the death of one of the Business Owners. (Can also deal with the situation where one of the Business Owners becomes disabled, goes bankrupt, retires, divorces, or wishes to sell their interest in the business.)
When is a buy-sell needed or useful?
A buy-sell agreement is a necessity if a business (including a professional practice) is owned by more than one person.
- Also works between a single Business Owner and key employees.
- A properly drawn, valued and funded buy-sell agreement can prevent a disaster, such as a forced sale or years in court.
Overall, the buy-sell agreement gives everyone comfort and security that they will receive maximum benefit from the business that they worked a lifetime to establish. Other specific benefits are that it:
- Provides that the surviving Business Owner will purchase the deceased or withdrawing Business Owner’s share of the operation.
- Provides funds to hire a replacement for the deceased employee.
- Provides funds to the widow or widower to replace the salary of the deceased.
- Provides assurance to the surviving Business Owners that the business will continue in a successful manner, while providing the deceased Business Owner’s heirs with funds that will enable them to meet their needs and pay estate tax and administration costs.
- Prevents an untimely forced sale.
- Sets forth the purchase price and how it is determined based on a pre-agreed to Business Valuation methodology.
- Creates a mechanism for providing the funds needed to make the purchase. One way to handle the problem is to require the purchase of life insurance. To meet this need, a “first to die” policy, which pays a death benefit on death of the first Business Owner, ensures that funds are available for the buy-out regardless of which Business Owner partner dies first.
- Allows the survivor a smooth transition, and the deceased Business Owner’s family its fair share of the value of the business.
- Allows for the continuation of the profitable business under such circumstances.