My experience in working with business owners have led to the following when it comes to buy-sell agreements. Most don’t have one and even if they do it’s not funded. I compare it to personal will and trusts. Most say that “they’ve been meaning to get that done,” and they know it’s important to get done.
The purpose of a buy-sell agreement in its simplest terms is to have a document that makes either the other owners or the employees whole if one owner has to leave the business.
A fully funded buy-sell agreement provides many advantages to a retiring or disabled owner, or the family of a deceased owner.
4 advantages to the retiring or disabled owner are:
1. Guaranteeing a purchaser for the business interest
2. Assuring a fair price for the business interest
3. Turning an illiquid asset into a liquid asset to help fund retirement
4. Providing an income producing asset which isn’t dependent on future success of the business.
4 Advantages to the remaining or surviving owners are:
1. Establishing triggering event to guarantee a sale at an agreed-upon price
2. Permitting uninterrupted operation of the business
3. Maintaining harmony and control with interference from the deceased owner’s family or a disabled owner
4. Providing the funds necessary to purchase the business interest