They say breaking up is hard to do. That’s probably why prenuptial agreements are so popular with so many couples. But what about your business?
If you co-own your business and one of the owners wants out, wants to retire, decides to sell his or her shares, or passes away, it can quickly turn messy if you haven’t worked out the details ahead of time.
That’s what a buy-sell, or buyout agreement, is all about.
Like a “prenuptial” for your business, a buy–sell agreement is a legally binding contract that outlines what will happen to the business in case of a “triggering event” such as the death, disability, or retirement of an owner or partner. It can also be a great help resolving disputes in case of irreconcilable differences. The buy-sell agreement covers:
- Who can buy a departing partner's or shareholder's share of the business
- What events will trigger a buyout
- What price will be paid for a partner's or shareholder's interest in the business
Is buy-sell right for you?
If you have partners in your business, the answer is likely “yes.” In fact, you should consider a buy-sell agreement an essential part of your business succession planning. What if the unthinkable should happen and one of your partners should die? A good business succession plan will:
- Ensure an agreeable price for the partner's share of the business and eliminate the need for valuation after death because the price was agreed to beforehand.
- Make benefits available immediately to pay for the deceased's share of the business, with no liquidity or time limits. This can help you avoid an external takeover due to cash flow problems, or the need to sell the business or other assets to cover the cost of the deceased's interest.
- Facilitate timely settlement of the deceased's estate
Bottom line – a buy-sell agreement can prevent all kinds of undesirable situations, like becoming an unwilling partner with an owner's heirs or leaving a surviving spouse financially strapped because the remaining owners refuse to buy the survivor's inherited share of the business. Ironing out the terms beforehand avoids these conflicts and protects everyone’s interest.
How do you fund a buy-sell agreement?
You have some options. You can set up a fund and add to it gradually with periodic payments. You can borrow the money at the time of death. Or you can arrange for installment payments to the heirs, purchasing the deceased’s shares over time. But every one of these options has serious drawbacks, including putting a strain on your working capital.
An insured buy-sell agreement, funded with life insurance on the owners' lives, is likely your smartest option. Business succession planning specialists and financial planners often recommend it to ensure the buy-sell is well-funded and guarantee the money will be there when it’s needed.
Breaking up just got easier!
Your business is one of your most valuable assets, and every day that you add value to the business without a transition plan increases your financial risk. Don’t get caught up in a messy breakup. Call the experts at Heffernan Insurance. We’ll analyze your situation and provide a solution that protects everyone’s interests, assuring an orderly transfer of your business. It’ll make breaking up a lot less painful, and it might even save the marriage.