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. Financial Advisor

    Buy-Sell Agreements: What Advisors Should Know

    Having a buy-sell agreement in place can cement a succession plan with a fair price and ensure a seamless transition to the new owner.
  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

    How Life Insurance Can Help With Liquidity

    Life insurance can provide liquidity in personal and business situations when access to capital is essential. Learn how to utilize its unique properties.
  4. 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.
  5. 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.
  6. 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.
  7. Retirement

    Balance and Protect Your Estate With Life Insurance

    Three tips for using life insurance to preserve your estate and equalize estate distributions.
  8. Financial Advisor

    How to Advise Business Owners Looking to Retire

    Here are some things to be aware of when advising business owners looking to retire.
  9. Insurance

    Tips for Helping Clients with Life Insurance Needs

    Life insurance needs will likely change over the client’s lifetime and again financial advisers can provide an objective sounding board.
  10. Insurance

    How To Avoid Taxation On Life Insurance Proceeds

    Decrease the value of your taxable estate and prevent the tax man from getting you one last time.
Frequently Asked Questions
  1. What Factors Cause Shifts in Aggregate Demand?

    Find out how aggregate demand is calculated in macroeconomic models. See what kinds of factors can cause the aggregate demand ...
  2. Who are Whole Foods' (WFM) main competitors?

    Learn more about Whole Foods Markets, who insists its products are sustainable. Thanks to the competition, however, its marketing ...
  3. What are the Differences Between Ex Works (EXW) and Free On Board (FOB)?

    Learn about Ex Works and Free on Board, the main difference between these Incoterms, and the responsibilities of buyers and ...
  4. What are Common Examples of Monopolistic Markets?

    Discover what causes real instances of market monopoly, how it persists and where monopoly privilege is most common in the ...
Trading Center