Do You Need a Buy-Sell Agreement?

Entrepreneurship is currently on the rise, largely driven by individuals who either are seeking to become their own boss or have decided to turn a passion into a full-fledged business. But how many of these small business owners have taken steps to protect the future of their businesses or have considered the legacy of their businesses after they die or retire? How many of them have included buy-sell agreements in their estate and business succession plans? Business owners must take the necessary steps to protect the future of their businesses by ensuring that a well-drafted buy-sell agreement is a component of their plans.

What is a buy-sell agreement? A buy-sell agreement is a legally binding agreement between the owners of a business and the business entity that details what will happen upon certain triggering events, typically the death, permanent disability, or retirement of one of the owners. Having a buy-sell agreement in place is important because it will prevent a withdrawing owner from freely transferring the owner’s ownership interest in the business to a third party without first offering the interest to the remaining owners or the entity.

The advantages of having an agreement in place strongly outweigh the disadvantages. A buy-sell agreements can:

• prevent withdrawing owners from selling their interests to a third party without the other owners’ consent

• minimize conflicts between owners because a plan is in place

• give business owners more security in preparation for retirement

• confer certain tax benefits for the business owners

• make banks and other lenders more comfortable extending credit because the future of the business is secure

• cover the expenses of finding a replacement owner

• cement the business’s core values and principles, and

• support the family of a deceased owner with the money from the transfer of the business interest after the owner’s death.

We often meet with clients who have a clear and definitive vision of how they want their assets to pass to their loved ones. Unfortunately, business owner clients often have not similarly considered how they want their businesses to continue after they are gone. Buy-sell agreements offer multiple benefits for clients who have worked hard to establish their businesses and are concerned about the fate of their businesses in the event of death, disability, or retirement.