Buy/sell agreements, also known as buyout agreements, help ensure partners in a business have a plan, and a financial arrangement, if one partner withdraws or is unable to carry on in the business.
Do you have business partners? If so, you need a buy/sell agreement.
First let’s define a buy/sell agreement. It is a binding agreement used by part owners of a business that governs what happens to an individual's ownership interest when that individual withdraws from the business, dies, or becomes disabled. It is also known as a "buyout agreement."
Buy/sell agreements are put in place to protect the owners of a business. For example:
What if one owner becomes physically disabled, and is unable to carry out his or her duties in the business? The other business owner or owners, as the case may be, have the right to buy the disabled owner’s share of the business. This ensures that the business will continue, and also ensures that the disabled owner is compensated for his or her shares of the business. Another example is if one owner suddenly dies. The surviving owner or owners need funds to immediately pay the deceased owners beneficiary for the deceased owner’s shares of the business.
A good buy/sell agreement protects all parties when the unexpected happens. By their very nature, buy/sell agreements must be fully funded ahead of time, because an unfunded or underfunded buy/sell agreement is completely useless.
One of the most common ways to fund a buy sell agreement is with a combination of life insurance and disability insurance policies.
When a business is worth many millions of dollars, and the owners are older, paying for the policy premiums can be a challenge. I will address how to overcome this challenge next week on The Alemian File.
If you have questions send an email to David@TheAlemianFile.com.
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Absolutely, make sure you come back here next week to for another edition of The Alemian File.