If you’re a business owner, your business is probably your pride and joy. (At least one of them, anyway.) Even if you share the business with multiple individuals, your interest in the business may be a sizeable portion of your net worth, as well as a representation of your hard work. 

That means it’s totally normal to have hopes for business continuity if you or one of your partners passes away. However, if you don’t plan thoroughly, your business may struggle in the absence of defined leadership or if a conflict arises between family members or other stakeholders. This can result in a distress sale, which will leave your beneficiaries with much less than the current value of your business. 

To avoid catastrophe, consider drafting a buy-sell agreement as part of your financial planning. A buy-sell agreement can determine how your business should be sold, as well as to whom and for how much. These transactions are frequently funded by life insurance policies. 

The basics of buy-sell agreements

Buy-sell agreements can be used for almost any kind of business entity because it usually applies to the stock shares and business real estate that business owners hold. 

There are variations on buy-sell agreements, but at its core, the agreement allows one party to sell its business interest to other owners/partners, to the business entity itself, or a combination of the two. Another option can allow for one or more long-time employees to purchase the business interest at stake. 

All impact parties by the agreement sign the document, but it’s important to note that it restricts the future sale of the business or property. Take for example, if a business owner planned on leaving business interest to their children. They could allow for each child to sell or transfer their interest to other parties, but only as dictated by the terms of the agreement. In this case, the buy-sell agreement might permit said children to sell their interest to grandchildren or other relatives. 

As part of the agreement, parties will agree upon a formula that determines the sale price of the business and its parts. There’s no one set formula for this - it could be based on financial report numbers, like the book value or the adjusted book value. It could also be based on a weighted average of past profit.

Knowing the benefits

When you’re building an estate plan, the goal is to remove uncertainty about what will happen with your assets after you pass on. If you’re a business owner, a buy-sell agreement can provide a higher degree on confidence that your wishes will be upheld. These agreements determine a buyer that is “ready, willing, and able” to obtain shares based on an agreed-upon formula or at a fixed price. There doesn’t need to be disputes or conflicts about the value of business interests between family members or business partners.  

Don’t leave your business continuity up in the air. Work with Smolin Lupin to develop a buy-sell agreement to protect your business value and prevent conflict. Contact us today to learn more about how we can help.