How To Write A Buy Sell Agreement
Fortunately, disastrous results may be avoided if you have a buy-sell agreement drafted during your lifetime. The agreement can dictate how the business is sold, to whom and for how much. Life insurance policies are often used to fund the transaction.
how to write a buy sell agreement
A buy-sell agreement may be used for virtually every type of business entity, including C corporations, S corporations, partnerships and limited liability companies. Typically, it applies to the shares of stock and any business real estate held by respective owners.
Although variations exist, the agreement essentially provides for the sale of a business interest to other owners or partners, the business entity itself, or a hybrid. Alternatively, the agreement may cover a sale to one or more long-time employees.
The agreement, which is typically signed by all affected parties, imposes restrictions on the future sale of the business or property. For instance, if you intend to leave a business interest to your children, you may provide for each child to sell or transfer his or her interest to another party or parties named in the agreement, such as grandchildren or other relatives.
Significantly, a buy-sell agreement often establishes a formula for determining the sale price of the business and its components. The formula may be based on financial statement figures, such as book value, adjusted book value, or the weighted average of historical earnings, or a combination of variables.
The buy-sell agreement addresses a host of problems about co-ownership of assets. For instance, if you have one partner who dies first, the partnership shares might pass to a family member who has a different vision for the future than you do.
A buy-sell agreement is a contract drawn up to protect a business if something happens to one of the owners. Also called a buyout, the agreement stipulates what happens with the shares of a business if something unforeseen occurs. This agreement also provides limitations on how owners can sell or transfer company shares. The contract is written to provide better control and management of a company.
Each business is unique in structure. A business with multiple co-founders would have a more complicated buyout agreement. In contrast, a sole proprietorship is often more straightforward to draft and execute. This list will give you a general overview of clauses and scenarios that should be considered in most buy-sell agreements.
How a Buy-Sell Agreement WorksA buy-sell agreement outlines a straightforward transition for business ownership in case of a trigger event (factual events that trigger the agreement, such as death, retirement, divorce, etc.). They are commonly used by business entities such as sole proprietorships and partnerships to make any changes to ownership run smoothly.
A buy-sell agreement is an agreement among the owners of a business that if any one of them leaves the business, then they will sell their ownership interest to the remaining members or to the company itself. This type of agreement can be used with any type of business structure.
The agreement establishes a price for the ownership interest. Often the company pays for a life insurance or disability policy that has the company as the beneficiary, allowing it to purchase the departing member's ownership share with the proceeds. A buy-sell agreement can be set up for a partnership, LLC, or corporation with shares.
Now, imagine one of your partners passes away. His ownership interest becomes part of his estate. His will may leave everything to his wife. Now, suddenly, you're partners with her, and the success of your business rests upon working with her. A buy-sell agreement helps prevent this scenario from happening.
The buy-sell sets a value on the ownership interests so that, if one person dies or needs to sell, there is a price in place. The buy-sell is good for the remaining members because of this, but it is also good for the exiting member because the agreement helps ensure the liquidity of the ownership interest and requires the members or company to buy back the exiting member's share.
As a sole owner, you could lose the value you've built up in the company if you decide to retire or if you become disabled. If you pass away, your family is left trying to run the business or sell it. And your valuable employees face the loss of their jobs and incomes, once you no longer own the business.
This problem can be solved with a well designed buy-sell agreement. Although there are a variety of ways to structure such an arrangement, the two most common approaches are the stock redemption and the cross-purchase plans. Because of leverage and tax efficiency, these plans are often funded with life insurance. Insurance can provide both the liquidity needed by the family to meet its tax obligations and the ready cash for the surviving owners to purchase the interest of the deceased shareholder.
In a stock redemption plan, the business agrees to purchase or retire the stock of a deceased stockholder. Typically, the business purchases life insurance on each stockholder to fund the arrangement. In a cross-purchase plan, the owners agree to buy the stock of a deceased partner. To fund a cross-purchase agreement, each owner buys life insurance on each of the co-owners. In both cases, life insurance guarantees that funds will be available if and when they are needed.
Amounts allocated to the profit-sharing account of a participant may be used to provide incidental life insurance protection for himself or anyone in whom the participant has an insurable interest [Treasury Reg. 1.401-1(b)(1) (ii)]. The IRS has agreed in private letter rulings that this regulation supports the purchase of life insurance on the life of a co-shareholder, to fund a cross-purchase agreement. (See PLRs 8108110 and 8426090.)
The funding of a cross-purchase agreement through a profit-sharing plan in this manner may work best for small, closely-held businesses with two or three owners. But, it can work in larger businesses as well, and this approach may provide a cost-effective means of purchasing life insurance. This is an important consideration for any business that may not otherwise have the ability to fund the buy-sell plan.
If you need help setting up a buy-sell agreement, choosing appropriate insurance coverage, or help reducing your tax liability exposure, please contact us at (312) 554-5889 or at email@example.com.
Business succession planning may provide the answer to the uncertain and unpredictable future. Specifically, you may wish to consider drawing up a buy-sell agreement to protect your Singapore business in times of unexpected events.
As an agreement that is legally binding between co-owners or partners of a business, a buy-sell agreement is important since it ensures that matters pertaining to the management and succession of the business were planned beforehand. It establishes procedures for the sale and purchase of shares, minimising possibilities of unhappiness and eventual litigation in future.
For example, in the absence of a buy-sell agreement, a spouse of an outgoing owner who was never involved in the business may inherit the shares. This might consequently create tension and problems in running the business if the spouse starts changing how things are done at the business for the worse.
An entity buy-sell agreement, also known as a redemption agreement, involves the business entity buying over the shares of the outgoing business owner upon a trigger event. This means that the business will enter into an agreement with each owner, on the understanding that the entity will purchase their respective interests in the event of a trigger.
A cross-purchase buy-sell agreement involves the transfer of shares to the remaining business owners upon a trigger event. Thus, upon a trigger event, the remaining surviving business owners will purchase the shares from the outgoing business owner as arranged in the agreement.
The most common and preferred method would be via an insurance pay-out. While death and disability are usually covered under the insurance, coverage may be extended to include other trigger events in the buy-sell agreement, including bankruptcy.
Life insurance policies can be used to fund both types of buy-sell agreements mentioned above. The number of policies required, however, would depend on the type of agreement and the number of shareholders.
In the case of an entity buy-sell agreement, the entity would usually take out an insurance policy for each business owner. Upon a trigger event, the pay-out from the policy of the outgoing owner will be used to purchase his shares. Thus, the business is the owner, premium payer and beneficiary of the insurance policy that will be used to fund the agreement.
For an entity buy-sell agreement, the number of insurance policies needed to fund it is relatively simple. Essentially, the number of policies required is equal to the number of business owners. For example, if there are 5 business owners, then only 5 policies need to be purchased.
For a cross-purchase buy-sell agreement, however, each business owner has to purchase and own life insurance on the lives of the others.. As a result, the policies purchased may outnumber the business owners as compared to an entity-buy sell agreement.
The number of policies can be calculated using the formula: n x (n-1), where n is the number of business owners. For example, if there are 5 business owners, the total number of policies to be purchased is 20 (using the formula: 5 x (5-1) = 20), which is 15 more than the number of policies required for an entity buy-sell agreement.
In a cross-purchase buy-sell agreement, the parties will be buying over the shares of the outgoing party. Hence, it is important that the owners have the desire to gain such extra shares in the first place.
A buy-sell agreement states that if a member retires or becomes disabled, the exiting member must sell their ownership to the other members or the company. The buy-sell agreement also says that if one member passes away, their estate will sell their interest in the company to the remaining partners or to the company itself. This protects the stability of the business and helps keep outsiders from suddenly having ownership interests in the company. 041b061a72