Business owners, both large and small, often put their blood, sweat, and (sometimes) tears into making their business as successful as possible. Often times this requires extremely long hours and six, maybe even seven nights a week. If the business has multiple owners, each owner’s hard work can go to waste if the owners fail to adequately prepare for unforseen events. Business planning, more specifically entering into a buy-sell agreement between the owners of the business, not only provides a smooth transition for unforseen events, but also ensures that the exiting business owner or his or her family receives its fair share of the value of the business.
A buy-sell agreement, at its most basic level, is an agreement between owners of a business which details what occurs if one business owner dies, becomes disabled, retires, divorces, terminates his or her employment with the business or desires to sell his or her interest in the business. Often, a buy-sell agreement provides that the remaining owner(s) or the company will purchase the deceased or exiting owner’s interest in the business. A properly drafted buy-sell agreement will set forth the purchase price of the deceased or exiting owner’s interest in the business or provide a mechanism to determine the purchase price. What many business owners often overlook is how the buy-sell agreement will be funded if one owner exits the business. The proper funding of a buy-sell agreement is as important as the determination of the purchase price. Without proper funding, the remaining business owner(s) may find it very difficult to raise the funds necessary to purchase the exiting owner’s interest in the business. One way to handle payment to the heirs of a business owner upon death is through the purchase of life insurance. Insurance companies sell “first to die” policies which pay a death benefit on the death of a business owner, ensuring that funds are available when one business owner dies.
The buy-sell agreement is critical to both the smooth transition of the business and the estate planning of each individual business owner. A properly drafted buy-sell agreement gives every owner involved in the business adequate assurances that the business they worked so hard to make successful will continue to be successful after their exit, while receiving the maximum benefit from the business upon their exit.