Using the Buy-Sell Agreement for Business Succession Planning
If your business partner died, and you do not have a Buy/Sell Agreement, are you aware that your business partner’s spouse or other heirs are now your new business partner? Planning for the succession of your business is an important consideration many business owners fail to make. The Buy/Sell Agreement is a simple solution for most business owners in these circumstances.
The Buy/Sell Agreement is a legally binding contract that outlines what happens if a co-owner dies, files for bankruptcy, there is an involuntarily transfer to a creditor (e.g., an ex-spouse), becomes disabled, resigns or retires. Usually, Buy/Sell Agreements are funded in three ways: 1) Life Insurance; 2) Cash; and/or 3) Promissory Notes. This article focuses on using a Buy/Sell Agreement for a death of a co-owner.
A Buy/Sell Agreement avoids two common situations when a co-owner of a business dies: 1) the surviving spouse will contact the remaining co-owner(s) asking where his/her share of the profits are; or 2) the surviving spouse, who has no experience in the business, takes over operation of the business. An advantage of entering into a Buy/Sell Agreement is that it creates a price for the deceased owner’s interest. There are a variety of ways owners can set a price prior to one’s death. Setting the price upfront avoids contentious litigation, and deals with potential estate tax issues as the IRS will be motivated to set the price artificially high as to create an estate tax liability.
Another advantage of a Buy/Sell agreement is that it converts illiquid closely held stock into cash. This allows the heirs of the deceased spouse to get paid. A properly funded Buy/Sell Agreement has prearranged funding options so the remaining owner has funds to pay the heirs of the deceased owner. Without a properly funded Buy/Sell Agreement there may not be liquid cash to deal with the succession planning.
If you do not have a Buy/Sell Agreement for your business, you are not protected in the event that something bad happens such as a death of a co-owner. Spangler and de Stefano, PLLP are experienced business and estate planning attorneys who have represented many business owners with their Buy/Sell Agreements.
The material contained herein is for informational purposes only, and is not intended to create or constitute an attorney-client relationship between Spangler and de Stefano, PLLP and the reader. The information contained herein is not offered as legal advice and should not be construed as legal advice.