Buy-Sell Agreements: Why Every Business Owner Should Have One
Rebecca Burchill, CLU, ChFC – Managing Director, Insurance & Financial Planning
may 2024
For many business owners, their business is their most important asset. It is the asset that makes all other assets possible. Ensuring this business remains viable in the face of a major life obstacle is a top priority. This is where a buy-sell agreement comes in.
A buy-sell agreement is a legally binding contract that outlines what happens to a business if one of the owners (or partners) decides to leave the business, becomes disabled, retires, or passes away. Essentially, it establishes the terms and conditions under which the ownership interest in the business can be bought or sold.
Here’s why a business owner might need one:
1. Ownership Transition
A buy-sell agreement helps facilitate a smooth transition of ownership in the event of a triggering event such as death, disability, retirement, or departure of an owner. Without such an agreement, disputes can arise among the remaining owners, heirs, or surviving family members regarding who has the right to buy or inherit the departing owner’s share of the business
2. Control
It helps maintain stability and control within the business by ensuring that the ownership remains within the desired group of individuals, such as remaining owners or key employees. This prevents unwanted outside parties from becoming owners or gaining control over the business.
3. Fair Valuation
The agreement typically includes mechanisms for determining the fair market value of the business interest, which helps prevent disputes over valuation in the event of a buyout. This can involve methods such as using a predetermined formula, obtaining periodic appraisals, or agreeing to an independent valuation process.
4. Funding Mechanism
The agreement outlines funding mechanisms for the buyout of the departing owner’s interest. This is often achieved through life insurance policies, cash reserves, installment payments, or borrowing. Without a funding mechanism in place, the remaining owners may struggle to come up with the necessary funds to buy out the departing owner’s share.
5. Continuity
A buy-sell agreement helps support a smooth transition of ownership by providing financial stability, maintaining continuity of operations, minimizing disruptions, and preserving the value of the business for the remaining shareholders and employees.
How can Lebel & Harriman help?
A buy-sell agreement is a crucial component of succession planning and risk management for business owners, helping to protect the interests of all parties involved and the long-term viability of the business.
Lebel & Harriman has decades of experience helping clients explore and fund buy-sell agreements. We would be honored to help you, too.
This document is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
