A buy-sell agreement is essential for smooth transitions and protecting ownership interests if your business has multiple owners. A well-structured buy-sell agreement can:
- Ensure liquidity in your ownership interest,
- Control changes in ownership, and
- Avoid IRS complications.
Types of Buy-Sell Agreements
- Cross-Purchase Agreement: Co-owners agree to buy a withdrawing owner’s interest if specific events occur.
- Redemption Agreement: The business itself repurchases the departing owner’s interest.
Triggering Events
These can include events like death, disability, retirement, or even divorce. Defining these in the agreement prevents disputes.
Valuation and Payment
The agreement should define the method for valuing ownership interests—often based on a fixed price, market value, or earnings multiple—and outline payment terms for buyouts.
Funding the Agreement with Life Insurance
Life insurance can provide funds to purchase a deceased co-owner’s shares, offering liquidity without financial strain. For cross-purchase agreements, co-owners may hold policies on each other, while for redemption agreements, the business itself holds policies on each owner.
Creating Certainty for Heirs
A buy-sell agreement can provide heirs with a fair, agreed-upon price for ownership shares, reducing estate tax risks and ensuring IRS compliance.
Establishing a buy-sell agreement safeguards all parties’ interests, ensuring seamless transitions and financial protection for co-owners and heirs. Given its complexity, professional guidance is recommended for setting one up.
If Your Business Has Co-owners, You Probably Need a Buy-Sell Agreement
