Funding Buy-Sell Agreements
When a business is owned by two or more people the stockholders should have a Buy-Sell Agreement in place. There are various types of buy-sell agreements and they are sometimes considered a type of a Business Will or a Buyout Agreement.
A buy-sell agreement is a written document that provides the procedures and governs the future transfer the businesses stock. These agreements created to protect the interest of the parties who own the business. It also directs the actions triggered by a stockholder leaving the business due to death, disability, divorce, dissolution, or retirement.
The buy-sell agreement will govern how and when
the shares of the business can be sold, or transferred, and how those shares will be valued. When the shares are transferred between shareholders and an estate the stockholders need to make sure the
funds to complete the transfer are available. To ensure that the funding required is available, buy-sell agreements are often funded with a life insurance policy. Should the death of one of the
co-owners occur, the life insurance settlement will provide the funds for the remaining shareholders to buy the deceased partners shares from the estate.
Life insurance coverage for each partner needs to be in place, because without a way to accomplish the purchase of the business shares the buy-sell agreement will not be functional. As the business grows and develops the amount of insurance needs to be adjusted to provide adequate coverage. Without the insurance the surviving stockholder may not have enough cash to satisfy the amount required to buy out the estate - leaving the surviving stockholders with an unwanted partner.
To have the adequate insurance coverage and to determine
the specifics of the buy-out terms, a certified business valuation is needed. There are a large number of companies that provide business valuations.
Buy-sell agreements are extremely important documents that need to be completed with seriousness and care. Even with a long standing partnership, it is only too late to create a buy-sell agreement when an event has already occurred....that would require the document.
Buy-sell agreements are important because the different elements of a future sell are predetermined and won’t need to be negotiated during a heated dispute, or during a grieving period. It provides both the stockholder and the family a comfort level that when the inevitable time comes for an exit strategy that the process was thoroughly thought out in advance.
Disadvantages of not having a buy-sell agreement, is that a disability may leave one partner working more and another not adding to the productivity. In the event of a death, without an agreement, one partner may be left with a nonproductive heir, or a new partner may be inserted that has personality conflicts with the surviving partner. The wrong partner could be devastating for the pharmacy business.
1. Insurance premiums that will fund the buy-sell agreement might be deductible – check with your CPA.
2. Make sure that the company’s business valuation is performed by a valuation company that has expertise in that specific industry.
3. When creating a buy-sell agreements consult a licensed professional because these are critical documents that should not be taken lightly.
4. Buy-sell documents need to address the proper laws and regulations, which vary from state to state.
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