By Robert Reaume
Managing Director | Life Insurance Division

Many businesses today lack a formal buy/sell agreement between owning partners. And even if an agreement is in place, it is typically not reviewed periodically to ensure proper and adequate funding. Correcting this common mistake is inexpensive yet critical. A well‑drafted and properly‑funded agreement ensures the succession of a business and provides current market value to each partner should an unexpected tragedy occur.

Some business owners think their spouse or key employee can run their business should they become unable to do so; others think that a competitor will buy their business if they are not around. Many think their death or disability will not financially impact the business at all. None of these misconceptions could be further from the truth.

The Purpose

Buy/sell agreements are legally binding contracts that spell out with certainty what will happen to an owner’s financial interest in the event of death, disability, termination, or retirement. When properly funded, the resolution will occur in an orderly fashion, avoiding disagreements and providing liquidity to a deceased or disabled partner’s estate.

A buy/sell agreement should be executed when a business starts, and updated moving forward whenever ownership or valuations change. If your company is established and you do not have an agreement in place, now is the time to act! These agreements provide a number of benefits, including:

  1. Designates who will purchase the business interest
  2. Establishes the method for determining the value of the business
  3. Indicates when the buyout will occur
  4. Determines the source of funds and how the buyout will be facilitated

Various types of buy/sell agreements can be drafted depending on the business structure, tax considerations, and funding concerns. Working with your legal, accounting, and insurance professionals will assure the correct design and most appropriate type of buy/sell agreement for you and your business partners.

Bottom Line

All businesses with multiple owners should have a buy/sell agreement. In order to be effective, it needs to be adequately funded with insurance and reviewed regularly. Taking time to establish these agreements is one of the best investments you can make in your business and most importantly, will provide all partners with peace of mind.

To have your buy/sell agreement reviewed for proper insurance funding or to learn more about how it works, contact an agent at Doeren Mayhew Insurance Group today.