Business Owners – A buy sell agreement could save you a lot of trouble.
If you own a business and have business partners, you will likely need a unique approach to your Estate Planning. Depending on the type of business you own, the value of the shares of your business could be fairly considerable. If you or your partner were to pass away, the family of the deceased may want to sell the portion of the business for a number of reasons. It could be that they don’t want to run the business or own the business. In certain situations the surviving spouse may actually want to run the business. If this were the case the surviving partner would likely have to go along, without much say. In order to avoid such a scenario, all the partners should consider a “buy-sell agreement”.
Surviving owners generally want to ensure that their ownership and management of the business continues exactly the way it is without having the family of the deceased attempt to control the business. Furthermore the surviving owner does not want to deal with a potential buy out situation jeopardizing the liquid assets of the business. On the other hand, deceased or disabled owners would likely want their families to be taken care of and compensated fairly for their share of the business. This is where a properly drafted buy-sell agreement comes into play and can achieve this objective.
In the scenario discussed above the buy sell agreement would generally be funded by an insurance policy that each partner takes out on the other. This ensures that when the time comes there are funds available for the surviving partner to purchase the business from the family. Furthermore it also ensures that the deceased partner’s family is well taken care of. Below is an example that will clarify this point:
Example 1: Tom and Greg own a gym, and are 50/50 owners. They do not have a buy sell agreement in place, but based on the profits that their business generates, each of their total shares are worth about $100,000. Greg suffers a heart attack and dies. His wife Tina now wants to run the business with Tom but has no idea what she is doing. Furthermore she is making business decisions that are detrimental to the gym. This is problematic and could have been avoided if Tom and Greg had a buy sell agreement in place.
Example 2: Now assume that Tom and Greg did in fact have a buy sell agreement in place and each had purchased a $100K insurance policy on the other. When Greg passed away, Tom could now collect on the insurance policy and pay Greg’s wife for the fair share of the business. This way Tom now owns 100% of the business and Greg’s wife Tina has also been compensated. Through the use of a buy sell agreement Greg can ensure that his family also receives a fair portion of the business upon his death.
There are other scenarios where a buy sell agreement is extremely important. Contact an attorney to find out how a buy sell agreement can save you a lot of trouble.