Small business owners have a variety of reasons for starting their commercial enterprises. Some launch a startup with the idea of bringing some new product or service to the world. Others just want to work for themselves. Still others have dreams about building a legacy that they can one day pass on to their children. As diverse as those reasons may be, business owners all share one thing in common: their business holdings need to be considered during any estate planning efforts. And when it comes to entrepreneurs who share ownership of a business with one or more partners, that estate planning should typically include buy-sell agreements.
What are Buy-Sell Agreements?
Buy-sell agreements are tools that can be used to complete the business asset portion of your estate planning, and can take a variety of different forms. While they can be used by solo owners – usually to limit the transfer or sale of business interests after the owner’s death, most people associate the concept with partnerships. In reality, this type of agreement can serve a vital role for any business owner, and can help to ensure that your assets are properly dealt with when you pass away.
If you own your business by yourself, you still probably want to ensure that it goes to the right people when you die. Typically, someone who uses a buy-sell agreement in this manner would have the future heir or heirs sign an agreement that would include any number of specific terms. In some instances, you might want to limit those heirs’ ability to sell their interests in the business to people outside the family. Other terms might include the price that must be used in the sale, or a formula that can fairly assess the current value of the business interest. You could even use an agreement to prevent your loved ones’ spouses from receiving ownership.
This can also be important for circumstances in which you might want to leave your property to multiple heirs, and you have concerns that they might not be able to come to agreement on how best to manage the inheritance. To prevent that confusion and possible conflict, you would simply create an agreement that outlined the specific terms by which any of those heirs can buy out the others’ interests.
Partners often use these agreements as a way to determine what happens to the business in the event one of them die. Provisions can be inserted into the agreement to set limitations on when and how buyouts can occur, who is permitted to initiate a buyout, and how the price of the asset is to be determined. Without an agreement, the surviving owner could be left dealing with his late partner’s heirs and forced into a partnership that he never sought. The buy-sell agreement would enable that undesired partnership to be ended in a structured way, as one party simply buys out the other’s interest in the company using a predetermined method for evaluating the selling price.
Note that this type of agreement can also be used to prevent the deceased’s heirs from even inheriting the decedent’s portion of the business. The buy-sell agreement can be structured to provide automatic purchase of the decedent’s interests by the surviving owner, with the proceeds of that buyout going to the estate of the deceased – and thus to his heirs. These types of buy-sell agreements often utilize life insurance policies to fund the buyout – with each owner taking out an insurance policy on the other and the proceeds used to fund the purchase when one of them passes away. In some instances, business partners can even use an irrevocable trust to accomplish that same funding result.
How Can a Buy-Sell Agreement Help You?
One of the most important benefits these agreements provide for businesses is greater stability. For solo entrepreneurs, this type of agreement can ensure that the owner’s business survives his passing. It can also help to prevent the business from being lost in the event that the owner is incapacitated or otherwise rendered unable to manage the enterprise. This can enable the business to continue operations even when you can no longer manage your duties.
If you’re leaving assets to multiple heirs, this can help those heirs to avoid having to liquidate the business to create an equitable transfer of assets. This is especially useful in cases where the business might be the sole major asset you possess. By using a buy-sell agreement, you can help to facilitate one heir’s buyout of the other heirs’ interests, preventing conflict and ensuring that the business remains in the hands of an heir who actually wants to maintain its operation.
For business partners, the benefits are obvious. These agreements can provide assurances that you’re never stuck co-owning the business with your partner’s heirs, or forced into trying to convince those heirs to sell you their interests. Instead of that conflict, you’ll have a previously-drafted agreement in place that can bypass any new negotiations or arguments about the terms of any sale.
Buy-sell agreements are valuable tools for all of these eventualities, but they are all but useless if they are not properly crafted. To receive the right benefits from this type of tool, you have to ensure that the terms are laid out in accordance with legal requirements. Moreover, you have to take steps to align this and other business planning tools with your overall comprehensive estate planning efforts. That requires professional help.
At Biddinger & Estelle, PC, our estate planning and business experts can assist you with the development of a buy-sell agreement sure to meet your business planning needs. We have the experience and expertise you need to ensure that your agreement accomplishes your business succession goals in a way that prevents future conflict, confusion, and financial disruption. If you’d like to learn more about how buy-sell agreements can be used to accomplish some of your most pressing estate planning needs, contact us online or call us today at (989) 872-5601.
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