Protect your business
What is a buy and sell agreement?
This is a legal agreement that states how a owners’ share of the business will be divided if that owner were to leave the business (usually if the owner was to pass away or become permanently disabled). This agreement will usually stipulate that in the instance that one owner were to pass away, the surviving owner will be obliged to buy out their interest in the business.
Why is it needed?
A simple example can highlight the importance of a buy-sell agreement; Two business partners own and operate a business and own equal shares in that business. If one of the business partners were to pre-maturely pass away, the beneficiary of that business partner will inherit the shares in that business. The beneficiaries are unlikely to be skilled or have expertise in managing and running the business and in addition may not even have any interest in doing so. However, should there have been a buy-sell agreement in place, the beneficiary would have received the funds to the value of their equity share and the surviving business partner would be able to continue operating and running the business.
A buy-sell agreement is used to help owners manage in difficult circumstances and allow the interest of family members and beneficiaries to be protected, as when these agreements are entered into there is an agreed upon valuation methodology and usually an insurance policy to act as a funding mechanism in order to buy out the deceased partner’s interest.
As mentioned above, this agreement will usually have a life insurance policy that is linked to it. This provides the surviving owner the money to be able to buy out the deceased/disabled partner’s interest.
There are a variety of ways that a buy-sell agreement can be structured and each manner of doing so will come with its own complexities and potential tax implications. As a result it is important to consult with your financial, tax and legal adviser to ensure that this is structure in the appropriate manner for your business.