If You Have a Business Partner, Then You Need a Buy-Sell Agreement
What happens to a business when the owner is suddenly incapacitated or dies? An event of this magnitude could mean trouble for your business, family, and employees. Partners and family members become stretched to solve problems during a crisis and could face significant financial burdens. A Buy-Sell Agreement is a written contract between two or more business owners that allows the business to continue without interruption during a life-altering event.
In addition, the agreement establishes the method for determining the value of the business interest when a triggering event occurs. Generally, five events can trigger the Buy-Sell Agreement. Also called the “Five D’s”: death, disability, disagreement, dissolution, and divorce. For each situation, it is determined in advance who takes control, when, and how to move forward in each scenario. This road map gives partners and their families added stability, providing clarity, fairness, and protection for all parties involved in a business with multiple owners. It's a proactive measure that can help avoid confusion and conflict in the future, making it an essential component of sound business governance and planning. Let’s look at the “Five D’s” of a Buy-Sell Agreement:
Death- This event is funded by life insurance with a clearly defined plan of action. The deceased partner’s ownership of the company is transferred to a designated entity and the family is compensated.
Disability- This event is also funded by insurance and a time frame is determined to take action.
Disagreement- This event is triggered by a partner who no longer wants to continue with the company or wants to retire.
Dissolution- Neither partner wants to continue with the business and steps are outlined to dissolve or sell the company.
Divorce- If a partner gets a divorce the business will be protected by a predetermined financial arrangement.
Ultimately, business owners should work with legal and financial professionals to draft a Buy-Sell Agreement tailored to their specific needs and circumstances. Carefully acquire experts who understand the tax implications created by a Buy-Sell transaction, including potential estate tax issues and structuring a buyout to minimize tax liabilities. Both the departing owner and the remaining owners need a tax-efficient manner for transferring ownership. If you’d like to know more about obtaining a Buy-Sell Agreement for your partnership, OMS recommends you contact Acentria Life Insurance expert, Scott Hutchison for a free consultation. Scott provides a team approach, giving owners access to experienced professionals who understand the legal, tax, and financial implications of all Buy-Sell scenarios.
Scott Hutchison, scott.hutchison@acentria.com
