If you or one of your business partners die, become permanently disabled, or leaves the business or retires, what will happen to your business? Will it continue? Who will be responsible for it? Creating a buy-sell agreement as part of your business succession planning can help ensure the continuation of your business in the event an owner is suddenly absent or incapacitated.
A buy-sell agreement is a legally binding contract that pre-arranges for the sale of your business. When a buy-sell agreement is created, you and any business partners will outline the terms and conditions of a future sale or buyback of a departing owner's share of the business. Buy-sell agreements dictate when, to whom, and at what price an owner, partner, or shareholder can sell his or her interest in the business.
Buy-sell agreements can help business owners in these ways:
- Keep you from being forced to work with or share business control with a stranger who buys an interest from a departing partner
- Keep you from being forced to work with a spouse or other family member of a deceased or divorced business partner
- Avoid co-owning your business with a bankruptcy trustee or creditor in the event a partner experiences financial difficulties
- Keep your heirs from inheriting a business which they cannot sell for a fair price
- Avoid price disputes with heirs of deceased business partners
What a buy-sell agreement can accomplish:
- Provides for orderly succession of a family business
- Gives partners and/or successors the cash they need to pay estate settlement costs and taxes after an owner dies
- Establishes a purchase price as the taxable value of an owner's interest in the business, reducing the likelihood of unexpected estate taxes at the time of the owner's death
- Minimizes the chance that outsiders will take over the business
- Protects business and remaining owners from disruption of operations, dissolution of the business, or liquidation in the event an owner dies or becomes incapacitated