Business owners often face a bit of a dilemma. They can’t imagine themselves no longer being involved in the company and are reticent to hand the reins to someone else. Still, they want to see their economic legacy continue long into the future, supporting generations to come.
A succession plan often provides the peace of mind – and answers – many business leaders value. These plans often include stipulations for what will happen to your ownership interest. A buy-sell agreement can help guide the way.
The basics of a buy-sell agreement
A buy-sell agreement, at its core, is quite simple. A designated party or parties (such as the co-owners of your business) agree well beforehand to purchase your interest in the company at the time of a specific event. This triggering event could be your retirement, for example, but might also be incapacitation or death.
The price the buyers pay might be locked in ahead of time, or determined immediately following the triggering event through other, predetermined means. In addition, this agreement can be mandatory and bind the buyers to this action, or simply optional.
In many cases, an insurance policy can be utilized to fund the purchase.
Benefits to establishing a buy-sell agreement
There are a few key reasons a business owner might want to set up a buy-sell agreement as part of succession and estate planning. Among them:
- It ensures your business interests will go to someone of your choosing, rather than inadvertently ending up in the hands of someone unequipped or uninterested.
- It can provide your estate a liquidity boost to help cover certain costs and pay heirs.
- The agreement can be crafted to minimize potential tax obligations for all involved.
- It provides stability and certainty for the business, rather than burdening it with a protracted legal dispute.
However, a buy-sell agreement is worth little if it is poorly written or improperly executed. Business succession is a big deal. It will dictate the future of the company you helped build. Ensuring the enterprise remains on the tracks for decades to come requires time, care and having a plan in place.