Do I Need a Buy-Sell Agreement? By SBAC Member, Alan Orlowsky

Many of our clients are business owners. Although these businesses tend to be successful, we have found that many of the owners do not have clearly defined succession plans. This month, we will look at one of the best ways to outline a succession plan, especially when partners or family members are involved in a business.

Sebastian and Kathryn met as project managers for a Fortune 500 company. After a couple of years of collaboration, they decided they could accomplish more and make more money in their own business. They’ve worked out most of the details about their individual roles, financial contributions, how they’re going to raise additional capital, and even who else they might invite to join their venture. Their attorney advised that they also give some thought to a “buy-sell agreement” – a term that was new to both of them.

When they learned that it was an agreement for the eventual disposition of their business, they decided they had plenty of time to worry about that later – maybe 10 or 20 years from now. Fortunately, their attorney was able to explain why a buy-sell agreement should be part of the start-up documents, and they saw the wisdom of making it a priority.

A Buy-Sell Agreement is a written agreement among the owners of a business in which each owner agrees that upon the occurrence of a specified event (death, disability, termination of employment, etc.), their shares shall be sold to the surviving owners at a specific price, and further, each owner commits to buy the shares of their departing co-owner upon the occurrence of a specified event.

There are several reasons a good buy-sell agreement is important to you:

• A valid buy-sell agreement will protect you and your family.

• If you retire or become disabled, your chosen successors will buy your interest at fair market value.

• If you die while owning the business, a buy-sell agreement can guarantee your heirs a buyer and a predetermined price.

• A buy-sell agreement negotiated between you and an unrelated successor provides a valuation that you can generally rely on for gift and estate tax purposes.

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