Why a Buy-Sell Agreement is Your Best Business Partner

Despite the odds of something going amiss, many of us enter into business relationships much as we enter our personal ones—full of optimism and blinded by a shared affinity. We’re partners for life, so what could possibly divide us? At this point, it’s hard to imagine a day when such a perfect union might start to crumble. But that day could come. That’s why there’s a special, and often overlooked, planning tool that should be shared by any partners in business together.

The buy-sell agreement

If your happy union doesn’t last, a buy-sell agreement spells out, in advance, what will happen to the business you own together. Much like a prenuptial agreement looks ahead to the unthinkable dissolution of a marriage, a buy-sell agreement is a premarital contract for business partners. Consider it a will for your business. It’s not only important to set up this type of agreement between partners, but to plan for the funding mechanism.

Contrary to popular belief, buy-sell agreements are not just about buying and selling companies.

They’re binding contracts between co-owners of a business. They govern what happens when a partner dies, suffers a disability, divorces, files bankruptcy, commits an act of fraud, or voluntarily or involuntarily retires.

They also spell out what transpires when an owner wants to leave, a new owner wants to join, or an outside third party makes an offer to buy the business. Without a properly drafted buy-sell agreement, that departing partner’s spouse or extended family member will be your new partner. Suddenly, there’s trouble in paradise.

Here’s where the buy-sell comes in

A buy-sell agreement arranges for a smooth transition of business shares to your partner(s) if you become disabled or pass away unexpectedly. It takes care of transferring each departing member’s portion of ownership to the surviving partner(s). To make sure this happens, a buy-sell contract requires the transfer of values (funding) that should be equivalent to the value of each partner’s ownership in the company.

The simplest method to ensure that adequate funding is available for the transfer of ownership is by having a Life Insurance and/or Disability Buyout Policy specifically designed for buy-sell agreements.

The Life insurance / Disability Buyout policy advantage

This line of coverage can also function as an additional benefit for the retention of future key employees buying into the business (think business succession). By failing to have a plan in place, a business could be crippled with litigation, a drain on assets and cash flow, large payouts and business interruption. A buy-sell contract simply makes good business sense almost any time partners are involved.

With a growing mobile work force, shifts in family dynamics, frequent job and city changes, and private equity in-flows, today’s need for buy-sell agreements is greater than ever.

Oswald Companies can help evaluate and analyze your current buy-sell agreement, review coverage, and help keep your business intact and flourishing.

For more information visit our Oswald Life page or contact us direct.

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This article originally posted in 2018 and has been updated.