What Is A Buy-Sell Agreement?

by | Dec 23, 2019 | Insurance Strategies, Life Insurance, Small Business Insurance

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A buy-sell agreement is aka a buyout agreement. It is a contract designed to protect a business should something happen to the owner or owners. Sort of like a prenuptial agreement for businesses. The agreement designates what happens with the shares of a business should something unexpected should happen. The agreement can also stipulate limitations as to how owners can sell or transfer shares of the company.

Triggering Buy-Sell Agreements

Should certain triggering events occur to one of the owners (or the sole proprietor) that may influence the continuity of a business, the buy-sell agreement kicks in. It protects the business and the remaining business owners from ramifications of an owner’s personal life that can impact the company.

Triggering events can include:

  • Death of an Owner / Partner
  • Divorce of an Owner
  • Disability or Long Term Illness
  • Personal Bankruptcy
  • Internal Conflict Between Partners
  • Retirement Specifications
  • Early Buyout Request

Any company can use a buy-sell agreement, especially if there’s more than one owner. The agreement would delineate how shares are sold in any situation. For instance, if a partner wants to retire, gets a divorce, or dies. The agreement would protect the business so that the heirs or a former spouse’s rights could be accounted for without selling the company.

Sole proprietors can use a buy-sell agreement too. If an owner wishes for a loyal employee to take over the company after their death. The owner can also use a buy-sell agreement to leave the business to an heir. An excellent way to lower estate taxes.

Agreements may be drawn up at any time.

Funding A Buy-Sell Agreement

Many businesses use life insurance for the execution of buy-sell agreements. A business with multiple owners, for instance, would have the business’ market value estimated. Each owner would then be insured by the other owners or the company for their portion of the company’s value. In case of a triggering event, the proceeds from the life insurance policy would be used by the remaining partners to purchase the deceased owner’s shares. With the valuation price going to the deceased owner’s family or estate.

Accounting for the total cost of the shares being transferred is also useful for a sole proprietor to pass the business to an employee or an heir. The life insurance contract would name that person as sole beneficiary. When the owner dies and the contract is triggered, the life insurance money is used to pay the estate. Then the company transfers the shares to the beneficiary.

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