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Today, small business owners invest their time, efforts and labor into making their business succeed. And although these energies provide an income and family benefits now, they need not cease when the owner retires, become disabled or passes away.

Therefore, it is generally recommend (especially when there are two or more partners / shareholders / owners) that a Buy-Sell Agreement is created and funded. It's a fairly easy process and can provide a piece of mind.

What is a Buy-Sell Agreement?

A Buy-Sell Agreement is simply a written agreement made between the partner or shareholders of the business specifying buy out provisions caused by such things as death, disability, divorce, bankruptcy, voluntary termination, company dissolution, etc.

The amount of the buy out will be based on some type of valuation model, peculiar to that operation of business.

Buy-Sell agreements should always be in place and funded BEFORE the commencement of operations. Yet for some unknown reason, this is rarely the case.

Why a Buy-Sell Agreement?

The execution of a Buy-Sell Agreement secures a number of very tangible benefits for the shareholders, including:

• Continuity of management and control for the remaining owners

• A ready market for typically non-marketable business interests

• Liquidity to the decedent's estate for estate taxes and administration costs

• A fair valuation of the business interest for federal estate tax purposes

• A fair return to the decedent's estate for his/her business interests

The Basic types of Buy-Sell Agreements

The three basic forms are each distinguishable by the purchasing party.

The following links briefly discuss and illustrate the important elements of each method. This information offers a general overview of Business Continuation agreements and is not meant as legal advice.

• Stock Redemption Plan, the corporation promises to purchase the departing shareholder's interest in the business.

• Cross-Purchase Plan, it is the individual shareholders that agree to buy, usually but not necessarily pro rata the business interest.

• Wait & See Buy-Sell Plan is a hybrid that allows the corporation and its shareholders to delay the purchase decision until the time of buyout.

Regardless of the form selected, the Buy-Sell Agreement establishes for the shareholders the terms of the purchase, including the events that trigger a purchase, the method of valuation, and most importantly, the buy out funding mechanism.

Funding a Buy-Sell Agreement

Careful consideration must be given to the funding aspect of the buy-sell equation. Many factors point to the use of life insurance in funding buy-sell agreements, including the following:

• Premium payments provide funding for a death-triggered buyout

• The buyout is funded with discounted dollars through the use of the death benefit

• Life insurance proceeds may be received federal income tax-free

• Cash value policies may provide funding for living buyouts and, if properly structured, may be accessed federal income tax free*

• Cash value policies with an increasing death benefit option may provide death benefit funding that increases along with the value of the successful business

Action To Take

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