Buy-Sell Agreement is Important Business Component

One of the most important issues facing a small business is the continuation of the business after the death, disability or retirement of a principal owner/operator. It is essential for a proper succession plan to be implemented to assure that there will be a smooth transition in the ownership and operation of the business. If no such plan is implemented, the day-to-day operation of the business may be seriously harmed, and the remaining owners may be left with a new co-owner that they cannot work with.

A buy-sell agreement is a binding contract among the owner/operators of a business that provides the terms for the smooth transfer of ownership and continuation of the business upon the withdrawal of an owner/operator. A buy-sell agreement may take the form of a "cross purchase agreement," which provides that the withdrawing owner will sell his interest to the remaining owners at a determined price. Alternatively, a "stock redemption agreement" may be utilized, in which the business itself purchases the ownership interest of the withdrawing owner. A combination of the two types of agreements also may negotiated, in which the business has the first right to purchase the ownership interest of the withdrawing owner, and the remaining owners have the right to do so if the business elects not to purchase.

One of the key issues involved in developing a buy-sell agreement is the source of the funds that will be used to purchase the ownership interest of the withdrawing owner. In many instances, the business itself, or the remaining owners, do not have the funds immediately available to furnish the purchase price. Many businesses find that life insurance policies and disability income insurance policies can be very helpful in providing the guaranteed liquidity to fund the buy-out without forcing the remaining owners to sell assets or borrow money.