Buy-Sell Agreements

When we talk about Buy-Sell Agreements, what we mean is an agreement between owners to buy each other out. What we don’t mean is an agreement where a business is bought or sold. There are three reasons why a business needs to have a Buy-Sell Agreement:

(1) To avoid being partners with someone you did not intend to be partners with such as an ex-spouse, the IRS or a bankruptcy trustee. You want to make sure that you are in fact partners with the person or people that you intended to be in the first place.

(2) To have a business “pre-nuptial” agreement. You want to make sure that you understand how you are going to break up while everyone is still happy.

(3) Succession and Estate planning purposes. You will want to establish who will buy a person’s share, and for what price, if that person should pass away.

The most difficult issue when dealing with Buy-Sell Agreements is determining the valuation of the business. One approach to this is to establish a formula, agree to a valuation expert or simply set the number every year. A simpler way is for business owners to establish the value of the business each year and then separate out the ownership accordingly.

Another issue regarding Buy-Sell Agreements is financing. There are typically two ways that Buy-Sell Agreements are financed: (1) life insurance or (2) finance the buy out amount over time.

It is important that all of this is done correctly and, in setting up the Buy-Sell, you should speak with your business attorney, estate planning attorney and your life insurance professional.