LL&D Law
Having an Effective Buy-Sell Agreement for Your Business

by Susan B. Loving
3/30/2011 6:03:00 PM

     A buy-sell agreement is a contract between owners of a business. It is often used by stockholders of a small or closely held corporation, where the company depends on the stockholders to work in the business and the stockholders depend on the business for income. It may also be used in partnerships or other business arrangements.

     One important purpose of a buy-sell agreement is to decide in advance how the business will handle the death of a partner. For instance, what happens to his stock? What if his wife or child inherits it, or it is divided up during probate? You may wind up with an unexpected and unwanted business partner, including one who may want or need to sell the business. A buy-sell agreement protects you by giving you the right to purchase your partner’s interest in the business, based on a pre-determined formula for valuing the property.

     The key to an effective buy-sell agreement is that you provide a mechanism for funding the stock purchase (at the same time ensuring your partner’s loved ones receive their share of the value of the business). Your business may be very valuable as a going enterprise, but do you have cash available to buy your partner’s interest? Often, buy-sell agreements are funded by life insurance. The policy can be designed to provide sufficient cash to buy your partner’s stock, and ensure cash flow for the company as you and your business recover from the loss of a key component of its success.

     Other matters may also be addressed in a buy-sell agreement. Suppose you become disabled and unable to work.  How long can or will your partner continue to pay your salary from the business? If the business is small and each of you does half the work, how long can the business afford to pay both of you, if only one is working?  

     The cost to obtain a buy-sell agreement is usually modest. Even for very small businesses, it can be an investment that protects you and your loved ones from financial disaster.



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