A buy-sell agreement is a written contract between two or more owners of a business, or among owners of the business and the entity. It sets out rules and expectations about what will happen in the event of the death, disability, divorce, insolvency, employment termination, or retirement of any owner (a “triggering event”).
A buy-sell agreement provides a plan for the orderly transfer of any owner’s business interest. Consider a buy-sell agreement for your business if:
A buy-sell agreement can:
The buy-sell agreement can ensure that the ownership of the company continues on in a manner that is in the best interests of the company and fair to the owners by spelling out what happens under different triggering events.
Shareholders agree on a fixed price in the agreement
Shareholders agree on the appraisal process at the time the agreement is executed
Shareholders agree to use comparables of recently sold, similarly situated companies
Typically an asset-based or earnings-based formula to determine value
Factors that typically influence the choice of funding methods include the size and structure of a business and its tax bracket; the number of owners involved, their ages, tax brackets, and percentages of ownership; and the levels of cash and/or credit available to the business entity or to the owners, as well as the type of buy-sell agreement.
Buy-sell agreement funding options
Drawing on a line of credit or other borrowing against other assets may be another source of liquidity
Selling to an ESOP creates beneficial ownership for the employees while also providing tax advantages
When the death of an owner is a triggering event, life insurance is one of the most common funding vehicles; policies could be owned by the business, by individual shareholders, or by a trust or a limited liability company for flexibility.
In most cases, the buy-sell agreement is more of a contingency plan. It serves as an agreement about what we will do “in case of emergency” if something goes wrong or off plan. Often, the terms of the buy-sell agreement will have little to do with your long-term succession and exit plan, whether that entails transferring a business to children, selling to a key employee, or someday taking the business public.
However, there are some circumstances where a buy-sell agreement can function as a long-term succession plan. For example, in a professional practice with multiple owners, a buy-sell agreement could function over many years like a rule book that governs how new owners are selected, how they buy into the business, and how they exit the business and sell their ownership interests at retirement.
Your team of professional advisors (Wells Fargo relationship manager, attorney, CPA, appraiser) can assist with building and reviewing your buy-sell agreement to help ensure it meets your current business needs. To learn more, contact your advisor.
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