Buy-Sell Agreements
A buy-sell agreement, also known as a buyout, is designed to protect or continue a business should it experience an unforeseen circumstance. If a co-owner wants out of the business, to retire, to sell their shares to someone else, goes through a divorce or passes away, a buy-sell agreement acts as a sort of "premarital agreement" to protect everyone's interests, setting the price and terms for a buyout. These are binding contracts between co-owners that control when owners can sell their interest, who can buy an owner's interest and what price will be paid.

Buy-sell agreements can be used to lower estate taxes in businesses where at least one co-owner plans to leave the interest to heirs who will remain active in the business. This can help a family business owner pass the business onto children or other relatives without burdening them with unnecessary estate taxes caused by an aggressive value of the business. The key for estate planning is choosing a conservative price or valuation formula for the business in the buy-sell or buyout agreement. The result can be to legally set the value of the ownership interest at an amount considerably lower than its sales value at the time of death.

Most buy-sells are funded with life insurance because it is the only means of guaranteeing that death, the event which creates the need for cash, also, creates the cash to satisfy that need. Other alternatives are available such as borrowing or creating an installment plan, but life insurance is the most common.



Sample Questions 1 - 4

Related Articles
  1. Insurance

    Using Insurance in a Business Succession Plan

    How to use life and disability insurance to help fund a business succession or buyout plan.
  2. Managing Wealth

    5 Reasons Small Business Owners Sell Their Companies

    Selling a business you've built from scratch isn't done lightly. Consider these moments when the opportunity might be right for you.
  3. Financial Advisor

    Estate Planning Tips for Financial Advisors

    Estate planning is not a set-it-and-forget-it proposition. Here are some tips for you and your clients.
  4. Small Business

    How To Create A Business Succession Plan

    Make sure the business you built continues to thrive long after you've left the helm.
  5. Insurance

    Will Insurance Keep Your Business Safe?

    Skilled employees are key to a successful business. Find out how to avoid a financial setback if they leave.
  6. Small Business

    Which Type of Organization Is Best For Your Business?

    Learn the differences between the types of business organizations so you can determine how to best structure your business for tax and liability limitations.
  7. Personal Finance

    Marriage, Divorce And The Dotted Line

    Does signing a prenuptial agreement put your marriage on shaky ground, or is it just smart planning?
  8. Investing

    The LLC Operating Agreement Template, And Why You Need It

    For some business owners, creating an LLC offers the best of both worlds. But your state's rules might not suit your needs. Hence the Operation Agreement.
  9. Financial Advisor

    Why the Wealthy Should Buy Lots of Life Insurance

    Wealthy clients have an enviable problem — managing, preserving and growing wealth. Properly structured life insurance can help with these goals.
  10. Personal Finance

    Create A Pain-Free Postnuptial Agreement

    This marital contract can underline your love for each other - not undermine it.
Trading Center