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BUY/SELL AGREEMENT

Guest post by: Barry Lizmore

Article Overview: It is a strategy to ensure the continuity of a business should a partner leave the business. This may be a planned retirement or because of death or a disability. It is basically a funding arrangement for the remaining partners or owners to purchase the share of the business from the departing participant.

BUY/SELL AGREEMENT

BUY/SELL AGREEMENT

Who can benefit?

Owners of small business which are jointly owned with non family members. A buy/sell agreement would also assist family owned businesses, which require a settlement of the business upon the death or disability of a family member or if the family member wishes to leave the business. All ownership structures of a business, such as a partnership or company, may benefit from a buy/sell agreement.

What is it?

It is a strategy to ensure the continuity of a business should a partner leave the business. This may be a planned retirement or because of death or a disability. It is basically a funding arrangement for the remaining partners or owners to purchase the share of the business from the departing participant.

An important part of the process is arriving at an acceptable valuation of the business which must be updated as the business grows. A buy/sell agreement may be funded by personal risk insurance to cover insurable risks such as the death or disability of the partner.

There are also non insurable events such as retirement, business disputes or incarceration, bankruptcy or loss of professional status of the individual. Loss of professional status would be applicable for an accounting, legal or medical practice. A buy/sell agreement is formalised by a legal document which defines the trigger events and how the business is valued.

To understand how a buy/sell agreement works it is best to use an example. Say that there is a partnership owned by three equal partners. The business is worth $1.5 million. Therefore the share of each partner is $500,000.

If one partner was to die or suffered an illness which prevented him from working, the buy/sell agreement would come into effect. The departing partner or his estate would receive the agreed value of $500,000 for his share of the business. This would be funded by a life insurance or total and permanent disability policy of $500,000.

If there was not a formal buy/sell agreement there could be a dispute on how much the business is worth. Secondly, if there was no funding arrangement the remaining partners would have to raise the required $500,000 to pay the departing partner of his estate.

What are the benefits?

A well structured buy/sell agreement ensures the continuity of the business and safeguards the owners stake in the business both for the remaining partners and the departing partner and his estate. It helps to reduce the possibility of disputes when one partner wishes to access his equity in the business.

Any downside?

Failure to review the buy/sell agreement on a regular basis may result in a purchase price that is not a true value of the business. This may be against the interests of either the remaining partners or the estate of the deceased partner or the departing partner. Many trigger events are not insurable and so must be funded outside of risk insurance.

Related topics

Company, Partnership, Personal Risk Insurance, Tax Entities, Will

This is an excerpt from Financial Planning A to Z, to be published in late 2012. Refer my websitefor more details.

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Article Tags: buy sell, estate planning, insurance, small business, valuation
Referred by: www.robbourne.com.au



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