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Buy-Sell Agreement

A buy-sell agreement is a critical planning tool for a business. The buy-sell agreement can be used to retain important personnel or handle the loss or disability of an owner.

A buy-sell agreement can be a little difficult to understand when discussed as a general concept. At its core, it is a written plan that details how certain events in the “life” of a business will be handled. This is obviously a rather vague concept, so let’s look at two examples that can detail out how the buy-sell works and why it is so critical to your business.

Scenario One

You and I go into business together. It doesn’t matter what we are providing, but let’s just assume we build and sell plasma televisions for the purpose of this example. You are single and I am married. You don’t really care for my wife that much, but it isn’t a big problem as you rarely see her.

Our business is going very well. In fact, we are considering undertaking a huge expansion. While at lunch one day, I suffer a massive heart attack and pass away. Guess what? In states like California, my spouse inherits the ownership of my property. This means you have a new partner in the plasma television business – yes, my wife who you are not fond of.

This scenario plays out just about every day across the nation. A buy-sell agreement can prevent it. Said agreement usually contains provisions detailing how such situations will be dealt with. There are different approaches, but the most common usually involves the business buying life insurance. When death occurs, the proceeds of the life insurance are used to buy out the surviving spouse. It is a win-win that a minimum amount of planning can make happen.

Scenario Two

You and I are pursuing our plasma television company. I am happy to report that my chest pain at lunch was just some indigestion and I feel better now. Even better, one of our researchers has come up with a new technology that will revolutionize the performance of our product and make it the best on the market. In fact, he is doing these kinds of upgrades all the time. Put another way, he is a huge asset for the company.

So, how do we keep our researcher from being poached by one of our competitors? We give him incentives to stay. One way to do this is to write up a buy-sell type of an agreement [a key man agreement] where he can slowly obtain either big cash payouts in the future [funded with life insurance] or even an equity position in the company. This gives him a vested interest in the company, which means it is far more likely he will stay on and continue to deliver great ideas.

These are only two examples of how buy-sell agreements can be tailored to assist a business. Contact us today at (800) 341-5433 to learn more about the options available.