A buy-sell agreement is a contract among business owners that decides who can buy an owner's interest, at what price and how it is paid for when an owner dies, becomes disabled, retires or leaves. Without one, a family member or outside party can end up owning part of your company. It is a core piece of business succession planning in Chattanooga.
Death, long-term disability, retirement, divorce and voluntary or involuntary departure should each be addressed, with terms for each.
Agreements use a fixed price, a formula or a periodic independent valuation. Fixed prices go stale quickly, so update them on a schedule.
Life insurance often funds buyouts at death, disability buyout insurance covers disability, and installment notes or sinking funds cover retirement. An unfunded agreement may leave the buyer unable to pay.
In a cross-purchase, buying owners receive a new cost basis in the purchased shares, which can reduce capital gains if they later sell. In an entity redemption, the remaining owners' basis may not increase. With several owners, cross-purchase agreements can require many insurance policies, which is one reason some businesses choose a hybrid structure.
Your share of the business may be your largest asset. The buy-sell agreement should match your estate plan, your spouse's expectations and your retirement income needs. If the agreement sets a price that is too low, your family could receive less than the business is worth.
A sole owner can use a one-way agreement with a key employee or competitor to create a buyer and a price in advance.
Review it at least every few years and after major changes in value, ownership or tax law.
A business attorney drafts it, with input from your CPA and financial advisor on valuation, funding and taxes.
Planning your exit or protecting your partners? Start with our business succession planning in Chattanooga team.
This article is for educational purposes only and is not individualized investment, tax or legal advice. Talk with a qualified professional about your specific situation.
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