Many small business owners have a co-owner or multiple owners, which requires attention. Owning a business with others can certainly present challenges, and one of the most difficult is when one owner needs to transfer their interest in the company.
Do you know what would happen if you or your business partner passed away? Got divorced? Went bankrupt? Obviously, these are not the most appealing situations to think about, which is why so many owners are uninterested in updating and/or establishing their buy-sell agreement.
Definition: A buy-sell agreement is a contractual document that outlines what happens if a business owner needs to transfer his or her interest in the company. Think of buy-sell agreements like prenups for business owners; contingencies are clearly outlined for EVERY different outcome, which includes financial implications.
1) Contingency – a Buy/Sell agreement specifically outlines how the remaining partners of a business will acquire (purchase) the shares of the departing owner (whether it be due to death, termination or sale). Think about the implications of purchasing a shareholder’s interest – it may be costly. This is why many businesses choose to fund their buy-sell agreement with insurance.
2) Insurance – A buy/sell agreement can mention the idea of “key person” insurance, which is a policy that insures against the loss of, you guessed it, a key person. More specifically, the policy insures against the potential loss of revenue from a partner unexpectedly passing away.
3) Protection – Agreements clearly define succession plans. This reduces the chance of confusion upon the departure of one of the business’s partners.
4) Triggering Events
The buy/sell agreement (when prepared properly) will lay out exactly what happens in each of the scenarios listed above.
Do you have a solid grasp on your buy/sell agreement? Do you even have a buy/sell agreement? If the answer to either of those questions is no, you’re not alone! Some business owners had agreements created at the inception of their business, but have not updated it since. This is a mistake! These agreements must be updated as your business evolves.
We want to help you feel more comfortable about the future of your business – eventually, every owner will exit their business, the question is whether it will be on their terms or not.
Call us today to find out how we can help you!