Why Co-Owned Businesses Should Have a Buy-Sell Agreement

A Buy–Sell Agreement, also known as a buyout agreement, is a legal agreement between co-owners of a business, which dictates the state of affairs if a co-owner dies or leaves the business. It may be thought of as a “premarital agreement” between business partners or is sometimes called a "business will."
 
Issues and questions such as the ones listed below can be answered and solved with a Buy-Sell Agreement:

• What will happen if one of the owners of your company were to die?
• Would the deceased owner’s spouse or children want to take an active role in the running of the company? Or, might they expect an income without offering any financial value to the company?
• The deceased owner’s spouse or children might want to “cash out” their interest in the business.
• Do you have the liquid assets (cash) to buy them out?
• What’s the business worth? What’s a fair buyout price?
• Would a cash buyout weaken the financial condition of the company?
• Would creditors tighten up their requirements?

 
​A Buy-Sell Agreement details how the company will fund the buyout of a departed business partner. The four main ways to fund a buyout are:

• With cash reserves. This will reduce value of company, may hurt financial condition and cost dollar for dollar of value of deceased interest in company.
• With payment plan. This will reduce future earnings, affect financial condition and cost dollar for dollar of value of deceased interest in company, plus interest.
• Bank loan. The repayment of loan will be dollar for dollar, plus interest.
• Life Insurance policy. This will cost pennies on the dollar.

Contact Russ Morris to learn more about a Buy-Sell Agreement and how it can help your company.