Why You Need a Buy/Sell Agreement

Why You Need a Buy/Sell Agreement

P. Derek Ten Broeck Jr.
TB Group LLC


If you own a business, your long-term success will depend at least in part on how clearly you understand that your business is not you. Letting yourself be defined by your business will limit its growth and its possibilities. It can also give you issues of anxiety, control, and fear of the future. Avoid this mindset. Recognize that your business has a life of its own. Furthermore, you owe it a fighting chance to survive if anything happens to you. That is why you need a well thought-out buy/sell agreement. 


What Can Go Wrong?

Perish the thought you might get run over by a city bus, fall from a cliff while rock climbing, or struck by a meteorite. There are obviously lots of ways you could unwillingly abandon your business. You could also get divorced, file for personal bankruptcy, or become incapacitated. You could suffer a mid-life crisis and decamp to the South Seas.


Perhaps you already have plans and procedures that allow the business to continue functioning when you’re out of town. That is the least your employees, your customers, and your suppliers might expect from you. But think about the longer term. If you are suddenly gone, who owns the business? Perhaps it goes to your heirs, who may have no interest in it and no commitment to its mission. Or perhaps the question of its ownership sets off a legal struggle that the business itself may not even survive.


Types of Buy/Sell Agreements

If you have partners, your buy/sell agreement should make it possible for the partners to buy your share if something happens to you. This is known as a cross-purchase agreement. If your business is a sole proprietorship, your buy/sell agreement can provide for a key employee to buy it. You may even structure the agreement so the business itself can purchase your share. This is called an entity purchase agreement.


The important thing is that the agreement ensures business continuity while making sure your heirs are provided for.


Financing the Agreement

Where does the purchase money come from? A typical buy/sell agreement involves life insurance. Two partners, for example, can insure each other. If one dies, the other uses the insurance payout to buy the dead partner’s share. Cases of more than two partners can be managed the same way, it’s just a little more complicated. With a proprietorship, you can make the key employee or even the business itself the beneficiary. If you’re doing this with a key employee, however, you will need to have a binding agreement with him or her to buy the business with the insurance money.


There are sites on the web that offer templates for buy/sell agreements, but my advice is to involve a lawyer. There are doubtless issues you (and the template writer) haven’t thought about that a good lawyer can anticipate.


In fact, when you craft a buy/sell agreement, you should involve more than a lawyer. A certified public accountant can help with valuation questions. Of course an insurance professional can help structure the life insurance policies to perform the way you want.


Just don’t leave your business vulnerable and your heirs poor. Draw up the agreement and buy the insurance. We can help. At TB Group, we believe both your family and your business deserve to flourish, even in your absence. We’re here to make sure. Click here to set up your consultation with us.


Photo: “A Person Signing a Document in Close-up Shot” by Mikhail Nilov via Pexels.

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