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.
Yet, the time to create such an agreement is not during an ownership transition. It is better to plan your buy-sell agreement long before it is needed, when all owners are involved. This enables an orderly transition to be planned and helps all owners plan their financial future.
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
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.
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.
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.