If you are the sole owner of your business, and you pass away, your business may be at risk of dying with you. If you have a business partner, your family might suddenly be put into business with him/her upon your death. On the flip side, you might find yourself in business with your business partner’s family should your partner pass away first.
What if the deceased’s family was forced to sell its share of the business? If so, what’s a fair price?
Many business owners have a buy-sell plan in place, leaving nothing to chance and doubt.
Which buy-sell agreement is right for you?
There are several ways to structure a buy-sell agreement. Which method is right for you depends largely on how your company is set up, how many owners/partners there are and how long you’ve been in business.
The most commonly used buy-sell agreements include:
- Cross-purchase buy-sell agreements, where all of the individual owners agree to purchase the interest of the other owners following an agreed-upon trigger event.
- Entity-purchase buy-sell agreements, where the business itself agrees to purchase the interests of each owner following an agreed-upon trigger event.
- A partnership buy-sell agreement, which utilizes a trust or partnership to facilitate the transfer of an owner’s share of the business to the remaining owners.
- A wait-and-see buy-sell agreement, where the owners agree that either they or the business will purchase the interests of a departing owner, depending on which method is most advantageous at the time.(While these types of agreements can be helpful in reducing paperwork and affecting a smooth business transfer, they can also be very complex. They should only be drafted and reviewed by a qualified attorney.)
Benefits of a buy-sell agreement
The benefits of a buy-sell agreement, especially to a small or family-owned business, cannot be overstated. If structured properly, it can address – and eliminate – potential problems or issues before they arise. Here are just a few of the benefits of a well-thought-out buy-sell agreement:
- A known buyer for your business.
- A known purchase price.
- Estate liquidity.
- Business value.
- Improved access to credit.
- Greater retirement security.
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