When people enter business with each other, the last thing they think about is what will happen to the business if something were to happen to either partner? The ideal time to implement a buy/sell agreement is when two people first start out in business together.
A buy/sell agreement is a contract drawn up between business partners that allows a surviving partner to buy out the departing business partner’s share of a business should a specific event occur. The agreement provides certainty for the business into the future. This agreement is a binding document between co-owners of a business that protects the wealth of the business owners and their families.
The agreement, generally, is funded via life insurance on each of the partner’s lives. Whilst other funding can be used, insurance is generally the most cost effective method. This provides the funding for a deceased/disabled partner if an event occurs during their working life. A buy/sell agreement can be implemented, regardless of how the business is structured (ie partnership or company).
Why have a buy / sell agreement?
- Provides certainty with regard to the business direction. Both parties are aware of what will happen should a trigger event occur.
- There is an agreed method for valuing the business.
- Control of the business if your partner dies unexpectedly is transferred in accordance with the wishes of the business partners
All of these issues and more can be answered by developing a buy/sell agreement.
Not having an agreement can create extreme disruption to business owners at a time when they can least afford the disruption. Careful planning and implementing a buy/sell agreement can be the difference between a business continuing and failing.