The death or disability of a business partner can destroy families, ruin friendships, close businesses and eliminate jobs. But, fortunately, having a buy-sell agreement in place can help businesses owners, their friends and their families avoid such cataclysmic results.
A buy-sell agreement is a legally binding document that allows for the orderly transfer of business from a deceased partner to the surviving partners. It compensates the estate of the deceased partner, allows the business to keep operating and secures the jobs of its employees.
It does all this by establishing an agreement between the all partners of the business prior to death, in which the estate of the deceased partner is obligated to sell its shares of the business to the surviving partners at an agreed-upon price. The surviving partners are obligated to honor the agreement. The buy-sell agreement can minimize many of the disputes that may arise with the loss of a partner.
There are two types of buy-sell agreements: cross-purchase and redemption. With a cross-purchase buy-sell agreement, one partner personally buys out the other. With a redemption-style agreement, the business itself buys the shares.
“A buy-sell agreement provides cash to compensate the family of the deceased in exchange for the stock or right of ownership to the surviving partners,” says author and financial-services expert Joe Jordan. “With a buy-sell agreement, the business can be subjected to potentially destructive lawsuits that can destroy it, along with many families and close partnerships.”
In a buy-sell agreement, the value of the business can be established through a third-party appraisal, or through a formula such as percentage of sales or revenue, or income. The value is also typically a moving target, revisited every 12 months to reflect changes in the business.
A buy-sell agreements isn’t necessarily complex to create, but do require an experienced business or tax lawyer to ensure that’s done correctly. An agreement can cost a couple of thousand dollars, but can save hundreds of thousands – along with untold emotional stress – in the future.
If you are looking to buy a business but don’t have the funds available to do so, Biz2Credit can help. Call (800) 200-5678 to get started.