A buy-sell agreement is typically associated with the ownership of a small business. As the name might imply, a buy-sell agreement defines the terms under which an owner of a business can buy out or sell out to others – other owners, third parties, etc. With multiple owners, an up-to-date buy-sell agreement can give a good estimate of the value of the small business.
The benefits of a buy-sell agreement do not end with value. A buy-sell can be a great estate planning tool. The transfer of small business interests at death can be very difficult. How much is the business worth? Who controls the business while the estate is sorted out? How do we fund the buy-out of the heirs of the decedent? These can be addressed in a good buy-sell agreement.
Options for payout to an estate include a lump sum cash payment or potentially a promissory note paid to heirs over a period of time. Value can be determined by a predetermined amount or based on calculation of the current value of assets and liabilities. In terms of the funds for the buy-out, a company can take out a loan or possibly a life insurance policy on each owner. Each method has advantages.
Dealing with buy-sell terms before an exit event occurs is critical. Before there is talk of a buy-out, owners are typically on even ground. What is good for one is good for the other. Waiting until after the fact can leave one or both sides feeling disadvantaged. A buy-sell agreement is a flexible arrangement and can be tailored to any type of small business.
The comments posted in this blog are for general informational purposes only. They are not to be considered as legal advice, and they do not establish an attorney-client relationship. For legal advice regarding your specific situation, please consult your attorney.
Copyright 2015 Swenson Lervick Syverson Trosvig Jacobson Schultz, PA