You draft a personal will to make sure your wishes are known. A buy-sell agreement is a “business will”. You have spent a lifetime building a business you can be proud of and want to ensure its continuation as your legacy. You want to ensure the fruits of your hard work are realized to look after your family. Don’t leave these things to chance - plan ahead.

The best time to resolve disputes is before they occur. A buy-sell agreement is a legal agreement between business owners where, in the event of the death, disability, disagreement or retirement of one of the business owners, a structure has been put into place to compensate the person or estate. Upon the death of one of the owners, the estate of the deceased owner is forced to sell the business interest, and the surviving owners are required to buy the interest from the estate. A well-structured agreement will mitigate disputes and preserve the continuity of ownership in the business and ensure everyone is fairly treated.

Two partners have built up a very successful business. Sounds pretty good, so where’s the problem? Well, they had never really talked about the future of the business if something happened to one of them. They are both married, and in the event of the death of one of the owners, the wife of the deceased would take over her husband’s share of the business. This is just one of the “landmines” that could not only affect the business but friendships and families as well. The reality is that although the business partners may have enjoyed a good relationship, the surviving partner might not enjoy the same relationship with the deceased’s heirs.

The challenge with this agreement is that there have to be enough liquid funds in the company to buy the other shareholder’s interests. To meet this challenge in the event of death of one of the shareholders, one of the most cost effective ways is by using life insurance. First, a lawyer sets up the agreement between the parties, and then the accountant decides which valuation formula will be used to establish share value both now and in the future. Then it’s the job of the insurance professional to put together a policy that will address these needs and be flexible enough to be increased in the future as the business grows.

This sounds all very straightforward, but life is seldom like that. The agreement needs to be comprehensive enough to cover any eventuality, not just death. What other events will trigger a buyout in the case of disability, disagreements or just retirement? Will payments be by lump sum or over time so that the business or the remaining shareholders don’t have to overextend themselves, or a combination of both? Is a non-compete covenant required so that one of the partners doesn’t start a new business in direct competition with the old?

With a buy-sell agreement and a life insurance plan in place, your business and your family are protected. You have peace of mind and can devote your energies to what you do best…running your business.

June 25, 2008