Buy-sell agreements or buyout agreements are often referred to as prenuptial planning for business partners. What happens to the business if a partner dies, becomes incapacitated or wishes to leave are all things that can be addressed with solid upfront planning. It is extremely valuable having an attorney draft an agreement that deals with situations that could disrupt the business’ continuity. A solid buy-sell agreement provides a value of the business and partner’s interest as well as terms dictating how the business continues while providing proper consideration to the departing partner or his/her estate.
Funding the Agreement
Having a buy-sell agreement drafted is only part of the value. There are a number of ways to fund a buy-sell agreement that needs to be executed. You could buy out a partnership’s interest by cash or via installment sale. The problem with this solution is lack of liquid assets. Most business owners have a good majority of their net worth tied up in the business. You could borrow the money but you’re not guaranteed approval or favorable terms.
The best way to make sure a buy-sell agreement is executing on the back-end is leveraging dollars by taking out insurance. This can be done by taking out insurance on each other or funding a first-to-die (joint) policy. Consideration should also be made to look at disability insurance to help fund a partner’s buyout if they are no longer able to contribute to the business.
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