Many Business Owners start their business without consideration of how to get out at some point in time.Considering the tax implications, potential business continuation / disruption, and estate issues (particularly a minority interest which may be of little value to one’s heirs) it’s extremely important for business owners to develop a cohesive exit strategy.
Initial Discussion Issues for Buy-Sell Agreements:
The Company Value (now and potentially in the future)
Potential Buyers / Sellers (current owners / partners)
Buy-Sell Agreement Trigger(s)
Consideration for Death and Disability
Buy-Sell Agreement Types:
1. Entity Plan
The Corporation (Partnership) buys the interest of the deceased (disabled) shareholder (or partner) at a pre-determined price or monthly payout. Typically used when there are several owners.
2. Cross-Purchase Plan
Each surviving shareholder (or partner) agrees to purchase the interest of the deceased (disabled) shareholder at a designated price or monthly payout. This can also be done via an LLC (Limited Liability Corporation) Buy-Sell.
Advantages of a Buy-Sell Agreement:
I. Guarantees a Buyer for a Asset that may Difficult to Sell
II. Allows for Business Continuity
III. Establishes an IRS value for Estate Tax Purposes
IV. Establishes Payment Terms and Allows for Funding Options (Life / Disability Insurance primarily used)
Funding Methods For a Buy-Sell Agreement:
- Personal Funds of Buyers
- Requires Liquid Assets for Buyers
- Business Sinking Fund
- May Need Time to Accumulate and Inadequate when Needed
- Borrowed Funds
- Loss of Key Person may impair Credit Worthiness of Business and/or Shareholders. Obtaining Funds may be Difficult.
- Installment Payments to Heirs
- Could be Burden on the Business to Maintain Payments
- A Financed Retirement Plan may be Creative Method to Utilize an Installment Plan particurlarly if the Owners are Uninsurable
- Life / Disability Insurance
- Complete Financing Guaranteed From Beginning
- *Proceeds are Income-Tax Free
- Cash –Values allow for Payment Flexibility
Buy-Sell Agreements are an extremely effective Exit Strategy for Business Owners. Not only do they stipulate an obligated Buyer (in the event of a death/disability/other triggering event), properly funded Buy-Sell Agreements also stipulate the price, trigger, and necessary $funds to complete the transaction.
Please contact us to confidentially discuss your business and exit strategy options.
*Please note, all concepts, strategies, and products mentioned may not be suitable for you or your company. Information provided is not intended to be legal or tax advice. It is possible that the Transfer for Value Rule and other issues may apply on Life/Disability Insurance proceeds for a Buy-Sell Agreement. Please consult with your tax and legal advisor for specific tax questions.