Many people don’t realize their biggest asset is often their business. This month, we’ll cover what it means to protect your business with a buy-sell agreement.
What is a Buy-Sell Agreement?
A buy-sell agreement is a written agreement among business owners in which each person agrees that upon circumstance, their shares will be sold to the surviving owners at a specific price. Through this agreement, each owner commits to buying the shares of their absent co-owner upon the occurrence of a specified event, such as death, disability, financial trouble, or termination of employment.
It is crucial for business owners to have a buy-sell agreement in order to protect the future of their business.
Understanding the Importance of a Buy-Sell Agreement
- A buy-sell agreement will protect you and your family.
- In the event you retire or become disabled, your chosen successors will buy your interest at fair market value.
- If you pass away while owning the business, a buy-sell agreement can guarantee your heirs a buyer and a predetermined price.
- A buy-sell agreement negotiated between you and an unrelated successor provides a valuation that you can generally rely on for gift and estate tax purposes.
There are typically three main types of buy-sell agreements for business owners:
- Cross-Purchase Agreement: This agreement allows the remaining owners to buy the interest of a departing owner. Each co-owner must have sufficient capital to make the purchase. In the event of a death of an owner, each owner generally acquires a life insurance policy on the lives of each other owner, and the death benefits received are required to be used to purchase the deceased owner’s interest.
- Entity (or Redemption) Purchase Agreement: This requires the business to buy the interest of a departing owner. The remaining owners would then be the sole owners of the business. It is common to fund the purchase with a life insurance policy purchased by the business.
- Hybrid Agreement: A hybrid agreement provides both the remaining owners and business to purchase the interest of a departing owner. Through this agreement, individual owners have the right to acquire the interest, but not the obligation. If declined, the business would then be obligated to acquire the interest of the departing owner. Instead, a hybrid agreement may allow for both the remaining owners and the business to purchase the departing owner’s interest. A hybrid agreement is the most flexible and is often thought of as a mix between a cross-purchase and entity-redemption agreement.
In a buy-sell agreement, the valuation section is crucial to business owners because it defines how the value of the owner’s interest will be valued when there is a change in ownership.
If this section of the agreement is skipped, it will eventually lead to increased costs and time to define the interest’s value at the time of the change. The method of valuation must be clearly defined because it will determine the fair market value in the event of a change in ownership.
Protect Your Business Legacy with The Siegel Law Group, P.A.
Ensure your business falls into the right hands with Succession Planning Services by The Siegel Law Group, P.A. We can help you draft a Buy-Sell Agreement that details the future of your business in the event of unforeseen circumstances.
Get started today and discover all that Barry Siegel and The Siegel Law Group, P.A. can do for you.
We look forward to helping you plan a secure future for you and your business! Call The Siegel Law Group, P.A. today.