Buy-Sell Agreements Protect your Business – Part I
What would happen to your business if something happened to you or your partner such as one of you dying, becomes disabled and not able to work, or retires. This could lead to your business failing and you employees losing their jobs. There are ways to protect against that happening.
The buy-sell agreement is an important part of succession planning for business owners and establishes their rights between each other and the business. It explains what would happen in the event of the death, disability, retirement of any of the owners. These are called Trigger Events. A key benefit of a buy-sell agreement is to establish the framework for choices about how to deal with shares of the company and to try to eliminate friction over price and terms.
The buy-sell agreement makes sure the remaining owners can purchase outstanding shares of the company at an agreed upon price and on agreed upon terms. It can also generate funds to pay taxes and estate debts for a surviving spouse in the case of death of one of the owners. Buy-sell agreements are often funded by life insurance policies.
A well thought-out agreement can make sure the business will continue on uninterrupted and in some cases keep the peace in a family-owned business. Establishing the value of a small business can be difficult. One of the most important goals of a buy-sell agreement is to set the terms for a sale of the stock or membership interest of the business.
Another key part of the agreement is to decide how to fund the other owners who are buying the remaining shares of the business. Without funds to buy out the selling party’s interest, or at least an agreed upon terms for an installment purchase, there can be no sale. The goal is to keep the business running smooth without disruptions. Buy-sell agreements often address smooth management leadership transition and changes in ownership.
It can also help protect the jobs of long-time employees and reduce disputes among owners and employees.
The other major part of the agreement is estate tax planning. For example, a buy-sell agreement may contain a valuation for the business interest that will be respected for IRS valuation purposes. Without a plan in place, it might be necessary to sell off assets just to pay estate taxes. In addition, a lack of planning may result in delays in administering the estate.
There are no real drawbacks. The only negative would be a poorly drawn up agreement that does not anticipate changes or needs. That’s why it is important to keep it updated. Also, under Georgia law buy-sell agreements are valid for only 20 years, so those executed before 1994 are no longer valid.