Buy-Sell Agreements: Exit Strategy for Small Businesses

As a business owner, you’re often caught up in the daily motion of running your business. It’s easy to let important, but non-urgent aspects of business planning fall to the wayside.

Buy-Sell Agreements: Plan for the Future of Your Business

According to the CPA Journal, it’s important for a business with multiple owners to have a buy-sell agreement.

Why? A buy-sell agreement enables all business owners to create an orderly transition as well as plan for their financial future. Developing your businesses transition and succession plan is important…and it is better to plan long before it is needed. Otherwise, you can find yourself trying to put together a plan and/or agreement during an ownership transition. As you can imagine, this can be quite a challenge.

With baby boomers starting to retire, many small- and medium-sized businesses will be sold or passed on to the next generation of owners.

Purpose of Buy-Sell Agreements

When a business has more than one owner, a buy-sell agreement can be a powerful tool for ownership transition.

A buy-sell agreement provides a mechanism for an orderly business succession should an owner decide to transfer his interest due to a voluntarily event, such as retirement, or an involuntary event, such as death, disability, insanity, or bankruptcy.

The CPA Journal

Business Continuity

Not only can a buy-sell agreement help plan for a smooth ownership transition, but it also stipulates a method for setting the price and value of the owners’ interest in the company. By preventing disagreements amongst new owners, it also helps business continuity.

Family Businesses

A buy-sell agreement also affords the co-owners or the business entity the ability to maintain the option or mandatory obligation to purchase the interest from an existing owner. This enables the business to restrict outsiders or undesirable business partners from becoming owners, which is often a useful provision for family businesses.

The agreement controls what happens to the business if a specified event occurs, such as an owner’s retirement, disability or death.

The Role of Insurance in Buy-Sell Agreements

Buy-sell agreements also often include provisions for providing the buyer(s) with a means of funding the purchase.

• Life or disability insurance often helps fulfill the need for funding the purchase.
• Insurance considerations can give rise to several tax issues and opportunities.
• Life insurance as a funding method has an advantage: proceeds generally are excluded from the beneficiary’s taxable income, provided certain conditions are met.

A well planned buy-sell agreement plays a critical function in the future of many businesses.

Properly drafted buy-sell agreements can help avoid internal conflict and ensure a smoother transition in situations where one or all owners desire to leave the business.

Get Help with Buy-Sell Agreement Planning

Creating a buy-sell agreement can be a complicated process, with many tax and legal considerations. If you don’t have an exit strategy for your business, reach out to our firm to discuss getting one in place. We can help you navigate the necessary steps and have peace of mind for your future.