Why You Need a Buy Sell Agreement for Your Business

Why You Need a Buy Sell Agreement for Your Business

A buy sell agreement (often called a business succession agreement, business will or shareholders buy sell agreement) enables a business to continue smoothly in the event of a partner suddenly dying (or, in some cases, being permanently disabled).

Generally, a buy-sell agreement will mean partners agree to buy the other parties’ interest in the business in the case of a specified triggering event (usually death). The funds paid for the outgoing party’s interest will usually be given to that party’s family or other specified beneficiary.

Buy Sell Agreement Preparation

To prepare a buy-sell agreement, you should speak with your accountant and solicitor. With them, you’ll be able to think about and address:

  • the value of the agreement,
  • the triggering events (perhaps only death, or also including trauma and total and permanent disablement),
  • how the pay-out will be funded, and
  • any tax consequences.

The value may be an independent valuation, the result of a specific formula, or a periodically agreed to value.

If you are familiar with business documents, you may wish to DIY your own Shareholders Buy Sell Agreement.

Advantages

There are many advantages to having a buy sell agreement in place.

  • The company will continue to run smoothly after the owner has passed away and business partners won’t be pushed into working with a member of the owner’s family who is inexperienced.
  • In addition, with enough funding, the deceased partner’s family can maintain their standard of living and the potential for conflict within the business is reduced significantly.
  • There is also the added peace of mind and security that comes with having a buy-sell agreement in place.

Funding

A buy sell agreement can be funded in a wide variety of ways. It might be funded through

  • An insurance policy.
  • The sale of the deceased party’s interest to a third party.
  • Vendor finance.
  • Self-funding or external borrowing by the continuing principals.

If there is a shortfall, it should lay out how the unpaid balance will be paid.

When setting up a buy sell agreement, it’s recommended that you get advice from a legal professional to ensure it is legally sound and includes everything you expect to be included. There can be unwanted capital gains tax applied to these kinds of agreements too, so speaking to a professional is advised.

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