Considerations for Establishing a Buy/Sell Agreement

On behalf of John J. Pembroke & Associates LLC posted in blog on Friday, November 30, 2018.

Considerations for Establishing a Buy/Sell Agreement

If a business is operated by two or more owners, it’s wise for those owners to establish a buy/sell agreement in order to officially establish what will happen to the business should an owner die, become disabled or otherwise decide to leave. Failure to establish such an agreement can have negative consequences when the event occurs, substantially harming both the business and the future prospects of its owners.

Are you interested in establishing a buy/sell agreement for your business? If so, there are a few different factors you should consider. They are as follows:

Insurance almost always plays a big part in buy/sell agreements. In many cases, life insurance policies will be taken out on each individual owner, with the other owners listed as the beneficiaries on the policies.

This is done so that the existing owners can afford to pay for the ownership interest of the deceased owner. If life insurance policies aren’t taken out and an owner dies, the other owners will have to buy out his or her portion of the business with either the business’s money or their own money, and if provisions are not in place to do it over time, the business cash flow and operating capital will be unduly strained.

In every buy/sell agreement, there must be events designated which will cause the agreement to be activated. In most cases, these events include death, resignation, disability, and inability to carry out responsibilities as agreed upon.

There is a great deal of variation and nuance possible when it comes to listing these reasons. Because of this, it’s highly advised that you utilize the services of a business attorney. He or she will be able to draft your agreement in legal language that will provide the surviving business ownership with alternatives to address the circumstances.

When establishing a buy/sell agreement, setting a purchase price is important. This is the price that the remaining owners will be expected to pay a departing owner after he or she has left the company or died.

The price will have to be fair to both the departing owner or his estate, and to the remaining owners. In addition to price, the terms of payment, usually over time, have to be worked out. And, it’s best to do this when none of the owners are “heading for the door”.

A number of different factors can affect the designated purchase price and other terms over time. To establish reasonable buy-sell provisions, it’s recommended that you speak with a business attorney for guidance.

As you might expect, there are tax matters associated with buy/sell agreements. As always, these tax matters can be a somewhat complex. This is true regardless of whether a buy/sell agreement is being funded by a life insurance policy or not. And, the relevant taxes are not only income taxes, but estate taxes.

To get familiar with the nuances of a buy/sell agreement, including tax matters, we recommend that you work with a qualified business attorney. He or she will be able to walk you through all of the specifics.

Need help establishing your buy/sell agreement? Looking for a competent and reputable Bensenville business attorney? If so, the experts at John J. Pembroke & Associates are the attorneys to see.

We have worked with numerous business owners throughout the Bensenville area, helping them create buy/sell agreements for their companies. We look forward to helping you create yours as well.

Contact us today to schedule an appointment!