The Buy - Sell Agreement is like a pre-nuptial agreement for your business, except in the case of your business, it is essential, and prudent. Some mistakenly attach similar emotional issues as with a pre-nup, thinking they are somehow showing a lack of trust in a business partner. In fact, the Buy - Sell Agreement actually protects your business partner while protecting you, and protecting the business, which in turn protects employees, customers and suppliers- thus making it essential. At the same time, it also provides peace of mind for family members. Business owners don't plan to fail, but many fail to plan, and the results can be problematic to catastrophic
The Buy - Sell establishes an agreed upon protocol for dealing with the company in the event of various events affecting the partners of the company, such as a premature death, a disability, critical illness, or hopefully, retirement. The agreement can be invaluable in the case of a strong difference of opinion on the direction of business; a time any agreement may be difficult.
Consider, for example, what happens in the event of the premature death of your partner and CEO of your company. Without a prior agreement, his or her shares would pass to the estate and then to the heirs. Do you know who would end up coming to the office?
A Buy - Sell Agreement could establish an obligation for the estate to sell you his or her shares and a price for the shares or an evaluation method to determine a fair price. You, in turn, could be obligated to buy the shares, thereby protecting the family's interests. A cheap term insurance plan could provide you with the funds for the share purchase.
All partners would be afforded the same agreements and protection and most importantly, the agreements are made with existing shareholders, thereby avoiding negotiations with new partners after the fact.
Agreements can also include provision for disability or critical illness and other events. While we may think we would want to provide for a partner in such a situation, there are limits and a need for practicality.
Consider the case of a permanent disability of a partner; profitability is affected by the cost of replacing the job function, and priorities of the working and non-working partners become increasingly different. It is more logical to have a plan in place to provide the funds for the disabled party and transfer the shares.
As mentioned above, another purpose of these agreements is to provide parameters for retirement. In addition, there are excellent programs which can provide the funding on a tax-preferred basis. Please see our other articles on Corporate Insured Retirement Plans, Individual Pension Plans, One Pay Pension Plans and Retirement Compensation Arrangements, as examples. Some of these plans can also be used for a buyout in the event of disability or other situations, so if they are needed prior to retirement they are available, and if not, they are in place to fund a tax effective retirement.