I strongly recommend that you plan for your business’s future. Often, people invest in drafting wills, trusts, and powers of attorney, but it’s also important to invest in an estate plan for your business.
A popular tool to protect the future of a business is a buy-sell agreement. A “buy-sell” is a binding contract between you and your partner that governs what happens if one of you passes away, and should also address other situations where either of you can’t continue with the business. You can agree now that if one of you passes away, the other can acquire your interest.
The purpose of a buy-sell is to make the transition of ownership run smoothly. Now is the time to anticipate any potential conflicts that could upset the functioning of your business when an owner sells their interest.
You should decide ahead of time how to value the partnership, and what events will trigger a buyout. One of the biggest benefits of a buy-sell is limiting who can obtain an ownership interest in the company.
If you’ve been running your company for 20 years, the last thing you may want is for some young whippersnapper to come in and tell you how he’s going to change everything.
Continuity of management and control is priceless and it’s cheaper to invest in this kind of agreement now. If one of you retires, the other person probably won’t want the retiree to become a “backseat driver” with regard to how the business should run.
Are you concerned that if something happens to your partner you might not be able to afford to buy out his wife? It’s common to fund a buy-sell agreement and the resulting buyout with a life insurance policy. In a common scenario, the company would buy a life insurance policy on each partner and the proceeds would be paid to the surviving spouse (or whomever is the named beneficiary) in exchange for the deceased partner’s share.
Things can get more complicated if you have several owners of a business. Instead of buying multiple policies on one another, you can use what’s called an entity purchase buy-sell agreement, in which there’s one policy for each owner.
Of course, as with any life insurance, there are issues of cost, uninsurability and policy lapse. There are also other ways to fund buy-sell agreements besides insurance.
I recommend hiring a professional to help you draft your buy-sell agreement, if you choose to use one. These agreements can be complicated, and as is true with any business decision, things can get messy when emotions are involved.
Mary Luros is a business law attorney with Hudson & Luros, LLP, in Napa, and can be reached at firstname.lastname@example.org or 418-5118. The information provided here is not intended as legal advice, nor does it form an attorney-client relationship with the author. The author makes no representations as to the reliability or accuracy of the above information. In a perfect world we wouldn’t need disclaimers — or attorneys.