Having a plan for managing and distributing your assets for the future is the primary purpose of estate planning. Business owners also need to plan for the inevitable transfer of control of their business to someone else. Most state laws contain provisions that determine who would be the natural successor of your business. But you can make the decision on your own, if you plan now, by creating a comprehensive estate and business plan. One aspect of business planning that is very useful is known as a buy-sell agreement.
How does a buy-sell agreement work?
When a business partner dies, typically his interest in the company will not be sold to the remaining partners unless the deceased partner’s estate agrees. On the other hand, with a buy-sell agreement in place, the deceased partner’s share can be sold according to a predetermined method, spelled out in the terms of the agreement. Because buy-sell agreements can be customized to meet the specific needs and objectives of each business, this method of planning is very useful.
What kind of provisions should be included?
The provisions of a buy-sell agreement can put limitations in place on the future sale or transfer of certain real estate. In the context of family-owned businesses, provisions can allow your children to sell or transfer their respective interests only to certain individuals identified in the agreement. These provisions are typically used to make sure a family business stays in the family. Another option is to include a requirement that business property be kept separate, so that community property issues do not come into play.
When a buy-sell agreement should be used
In situations where business property is owned by two or more individuals, a buy-sell agreement is very helpful. This is also true if you plan to leave property to more than one individual. Buy-sell agreements are very helpful in preventing family feuds over inheritance. Co-ownership is complicated enough, without being further hindered by inevitable sibling rivalry or disagreement.
Types of buy-sell agreements
There are two types of buy-sell agreements: entity purchase (or stock redemption) and cross purchase. An entity-purchase or stock redemption agreement is a contract within a corporation. The partners enter into a binding agreement with the company for the purchase and sale of their respective interests. When they die, become disabled, retire or resign, those partners are obligated to sell their stock and the company is equally obligated to buy the stock back.
On the other hand, with a cross-purchase arrangement, the company is not actually a party to the agreement. Instead, the partners obtain a life insurance policy, naming each other as beneficiaries. They each agree to buy the other’s share in the business upon death, by using the life insurance policy proceeds.
If you have questions regarding buy-sell agreements, or any other business planning needs, please contact Sexton, Bailey Attorneys, PA online or by calling us at (479) 443-0062.