There are many agreements needed in business. In fact, commercial lawyers would tell you that almost every contract is an agreement of some kind and all are important parts of running a business. But when it comes to the Buy Sell Agreement, some businesses don’t have one and this can really complicate matters. What is a Buy Sell Agreement?
It is a document that details what will happen should one partner suddenly die or be incapacitated. Other names for the document are Business Succession Agreement and Business Will. Having it in place will enable the business to continue running smoothly when and if a partner dies or has a stroke so that they are mentally incapacitated.
Having this document means the partners have agreed to buy out the share of the person who has died or become incapacitated. The funds that are paid will go to the family of the deceased and can really help them in their time of need. However, they may go to another person that is specified in the document.
It is important to have advice from a legal professional in drawing up such a document. What should it contain?
- The value of the agreement – what should be paid? This can be defined through an independent valuation, a specified formula or an agreed value that is revised periodically.
- The trigger for the payment – usually death or incapacity of some kind.
- In what way the payment will be funded – there are many possibilities.
- Tax consequences.
- It enables the business to continue running smoothly with less conflict
- The partners won’t be pushed into working with a family member who is not experienced
- The family of the deceased will be able to maintain their lifestyle
- Peace of mind for all the partners and their families.
How to fund the Buy Sell Agreement
This can be done in one of several ways.
- Take out an insurance policy for that purpose
- Sell the deceased’s interests to a third party
- Through vendor finance
- Self-funding or getting a loan by the remaining principals.
- Any combination of the above
This should all be contained in the document so that everyone knows what to expect and how to go about it. It is important to have the document drawn up by a professional in order to avoid unwanted capital gains tax and to ensure everything is legal.
Running a business without insurance can have disastrous consequences and this is a form of insurance for the future of the business. Without such an agreement in place, many problems are likely to arise which can affect the efficiency of the business and cause grief and loss to all the partners.