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» Why Do I Need a Buy-Sell Agreement?

January 28, 2021

Business Strategies, Buy-Sell Planning, Disability Insurance, Life Insurance

As a business owner, you face a dizzying number of questions every day. Your focus is on keeping your clients and employees happy, making payroll, and investing in your business, along with dozens of other concerns.

Maybe you heard of a competitor or peer whose business was severely hampered or completely shut down by an owner’s unexpected departure.

And at some point, your lawyer or financial professional may have brought up the term buy-sell to you, but it didn’t catch your attention.

What exactly is it?

Why should you have one?

And why is it possibly the most important financial decision you make for yourself, your family, and your company?

You’ll Eventually Leave Your Business

You may spend 50, 60 hours or more a week in your business. You may feel like you never have a day off and that you leave it all on the table for your company every day. Maybe you can’t see yourself doing anything else in this lifetime besides building your organization.

But the reality is at some point, you will no longer work for your business.

Whether it’s tomorrow, next year, or decades from now, you will at some point work your last day in your business. How this affects you, your family, your business partners, and your employees is up to you and what planning you put into place today.

A buy-sell agreement is your opportunity to lay as much groundwork and planning in place for your eventual exit from the company. It’s your opportunity to influence what happens in the future for yourself and your business.

What is a Buy-Sell Agreement?

A buy-sell agreement is simply a document that outlines how a business and the owners will handle the ownership of the company as the results of any number of situations, including transference and sale in some cases.

The typical buy-sell agreement is will handle some common situations that the business owners may find themselves in and will also address company-specific situations.

Why Do I Need a Buy-Sell Agreement?

Arguably any organization in business should have a buy-sell agreement and funding in place. Now, many start-up businesses will probably not get around to this in their early days, but if your business has been in existence for a few years, you should strongly consider a buy-sell agreement and related funding strategies.

If you question whether you need a buy-sell agreement, ask yourself and your business partners these questions:

If you could no longer work in the business, who would own and operate it?

Would your family continue to receive income? How would your family’s financial situation change?

What does your business partner think about going into business with your spouse? What if the roles were reversed?

If you have any children in the business, are they ready to manage it starting tomorrow?

What would happen to the business if you needed to suddenly retire due to an unforeseen medical issue?

Your buy-sell agreement answers many “What if…” questions like this that deal with literal and figurative life-or-death situations.

As a business owner, you know that risks are out there. You’ve probably seen companies fade away and disappear every year. A buy-sell agreement is your best opportunity to control the effects of you or your partner’s exit.

What Do You Need to Know about Buy-Sell Agreements?

Every buy-sell agreement is unique to the business and owners involved. And it’s not a static document; best practices call for a review of the agreement and funding sources annually to keep up with any changes.

Your buy-sell agreement should answer these critical questions:

How will we handle the retirement, death, or disability of an owner?

How will we address the situation a business-specific event such as an owner loses their license?

How will we fund the exit of a partner in these events?

How is my family taken care of, whether they are in the business today or not?

How do these plans coordinate with my estate plan?

This is the first in a series of posts about buy-sell agreements. We hope you and your partners can learn something of value from them and they push you to take action to protect yourself, your family, and your business.

Our team at the LBL Group brings decades of experience in business and estate planning and a national network of professionals to a discussion about your business.

 

Click here if you’d like a complementary consultation about your business

 

Posted by in Business Strategies, Buy-Sell Planning, Disability Insurance, Life Insurance