Finance | | Nov 05, 2015
Buy Sell Agreement
Remember when going into business with a friend or family member, the terms of the agreement was settled with a handshake, a “gentleman’s agreement”. Oh, how the world has changed. Nowadays everything has to be in writing. This written agreement, called a Buy Sell Agreement encompasses, amongst other things, what happens in the situation that one partner passes away or has a disability, retires, or simply is bought out.
I know what you’re thinking, another piece of paperwork I need to pay a lawyer for and drive myself crazy over. But I can assure you that is not the case. Without a Buy Sell Agreement a company or family business could face a world of financial issues and tax problems over the death of a partner, divorce, bankruptcy, or retirement. The cost for this document is rather small when comparing it to the benefits you will receive. The Agreement keeps the business afloat and prevents the infighting of family members, co-owners, and spouses.
There are two different types of agreements:
Cross Purchase: If one partner, co-owner, etc. passes away or is physically/medically incapable to work, the other partner buys out their shares.
Entity Purchase: Otherwise known as “Redemption” is when the business itself purchases the company so the owners personally do not have an out of pocket expenditure.
Insurance is another aspect of Buy Sell Agreements. It is not mandatory to have a life insurance clause in your agreement, but it can be helpful. There is also disability insurance, but only if it is practical for your company. The benefits to the life insurance clause is, that, if one partner dies the life insurance policy on that individual can fund the buyout so the family members of the deceased partner are bought out as agreed upon in your Buy Sell Agreement.
Buy Sell Agreements, are incredibly fair for both partners, co-owners, etc. because there is no possible way to know who will pass away first. The reciprocal nature of the agreement allows for a simple negotiation between the partners. You will need a business or tax lawyer to help you choose the right agreement. At the end of the day, a few thousand dollars in legal fees in exchange for peace of mind and that your business will thrive after you’re gone, sounds like a fair deal to me.