Buy-sell agreements, also referred to as Buyout agreements, are used in many types of business structures, including corporations, limited liability companies, S corporations, limited partnerships, and general partnerships. The buy-sell agreement is the document that spells out how the business is purchased and sold with the solutions to different issues that can arise during a business lifecycle.
What Can Lions Financial Do for You?
A Buy-sell agreement is a contract that enables the remaining owners or heirs, to purchase the business interest of any co-owner who dies, becomes disabled, or retires. As an independent, non-captive, fee-based wealth management services firm, we can pinpoint your business’ unique needs and wants.
We implement a four-step SIRE – Survey, Insight, Recommendation and Execution process to help our clients achieve business success.
- Survey: We study your business before suggesting a plan. We spend time evaluating the different variables of your business to ensure that we have understanding of your goal and objectives.
- Insight: To have a deep insight of your business, complete industry research to identify the unique components that need to be taken into consideration. We review programs available to achieve objectives of the ownership structures and operational management,.
- Recommendation: At this stage, we will tailor a customized strategy to prepare for implementation of your unique business objectives. We work with you to present the viable Buy-Sell Agreements to take into consideration for exit options.
- Execution: With a conclusion on the type of Buy-Sell Agreement to implement we work with the legal and tax professionals to implement documentation with company valuation and financial products to fund the agreement.
Key Item to Understand in Buy-Sell Agreements
A buyout agreement does not define the terms of the sale or purchase of a company. A buyout agreement is a contract between the shareholders of a company.
The agreement determines whether a company must buyout a departing shareholder or whether a company has the right to buyout a shareholder when a certain event, such as a shareholder’s death, occurs. A buyout agreement protects shareholders from complications that arise when a shareholder decides to leave a company.
A buyout agreement determines:
- Who can buy a shareholder’s stock?
- Whether the company must buyout the shareholder
- How to measure the value of a shareholder’s interest
- Payment terms for a buyout
A buyout agreement ensures that a company can prohibit an unwanted buyer from gaining an interest in the company and determines how a shareholder can dispose of an ownership interest in a company. Shareholders of a corporation usually include buyout agreements in the articles of incorporation, the by-laws, or in a separate written agreement.
There are several different forms of buy-sell agreement:
Entity Buy-Sell Agreement
The business itself enters into a written agreement with the owners to purchase the interest of each individual owner. The individual owners agree to sell their respective interests to the business in the event of disability, death, divorce, retirement or departure of a co-owner. This approach may be appropriate if you’re a:
- Smaller business taxed as a partnership;
- Business with multiple owners and large age differences, or different ownership percentages among their owners;
Cross-Purchase Buy-Sell Agreement
The individual owners agree to purchase the interest of the other owners. Each individual is the owner and beneficiary of a life insurance policy on each of the other owners, and the policy proceeds are used to pay the purchase price. This approach may be appropriate if you’re a:
- Business with fewer partners-owners;
- Business owners who are close in age;
- Business with owners who are willing to personally own and pay for the insurance.
Buy-Sell Agreement Using Partnership Administration Succession Strategy (PASS)
Under this arrangement, the individual owners form a separate partnership, and the partnership acquires insurance policies on all the owners and administers the provisions of the buy-sell agreement. A buy-sell agreement is the foundation of a business succession plan, but you have to know where the money will come from or the plan can’t be implemented. There are only a couple of ways to fund a buy-sell agreement:
- Investment Capital. Unfortunately, cash is not always available when you need it most and depending on your business, you may need bring an outside investment to buy out a partner.
- Sinking fund. With this method, you set aside funds for the eventual purchase of the business.
- Borrowed funds or installment note. The business can get financing from the bank to borrow the funds to purchase the business or create an installment sale for a gradual payment over fixed period of time for the sale.
- Insurance Financing. For many business owners, insurance is required to mitigate risk for unplanned circumstances that may cause a forced sale of the business shares.
Contact Lions Financial to find a better strategy and holistic plan for your company. Lions Financial helps executives and businesses, together with their tax and legal advisors, to develop the optimal financial solutions for success. Contact us for in an initial consultation to determine how we can help your current business need.