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Buy/Sell Agreements Protect Your Business Interest


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buy sell agreements protect your business interest

Buy/Sell Agreements Protect Your Business Interest

The information contained in this presentation is being provided with the understanding that it is not intended to be interpreted as specific legal or tax advice. Individuals are encouraged to seek the guidance of their own personal legal or tax counsel.

slide2

What is a Buy/Sell Agreement?

  • A legally binding contract that requires one party to sell and another party to buy a particular ownership interest in a business in the event of the death, disability, or retirement of a partner or stockholder, or upon certain other triggering events such as divorce or bankruptcy
  • A plan that assures the prompt and orderly sale of the interest for the benefit of the decedent’s heirs and continuity of the firm for the surviving partners or stockholders
  • A buy sell agreement has a legal side (an agreement) and an economic side (providing dollars that will give the survivors the actual capacity to buy)
slide3

What Does A Buy/Sell Agreement Do?

  • It identifies a buyer or potential buyer of your business interest and the conditions under which a sale will occur
  • The buyer can be an individual or entity
  • More than one buyer can purchase your business interest
  • Typically, you can not sell your interest in the business to any party except the buyer named in the agreement once you are bound under a buy-sell agreement
slide4

Why You May Want to Have a Buy/Sell Agreement

  • Provides certainty that your estate will receive an immediate, pre-determined, guaranteed amount of cash for your business interest
  • Protects your heirs by eliminating the possibility of a forced sale
  • Provides liquidity for the payment of estate taxes and other estate settlement expenses
  • Avoids potential conflicts of interest between surviving owners and your heirs
  • Establishes the estate tax value of the business for unrelated owners (not for family-owned businesses) if structured properly
  • Maintains the stability of business operations
  • Improves the creditworthiness of the business
slide5

Who Should Consider Creating a Buy/ Sell Agreement?

  • Any business owner / owners who are concerned about
  • The continuity of the firm regardless of the actions you, your partners, or your partner’s family may take
  • The certainty that your business interest will provide an immediate, guaranteed, pre-determined amount of cash for your estate
slide6

Does Business Size Matter?

  • A Buy/Sell agreement can be set up for companies with one owner or many owners
  • Can be used by any type of business entity: sole-proprietor, corporation, partnership, limited liability company, etc.
  • Size of your business may cause one form of a buy-sell agreement to be more appropriate than another
slide7

When Should a Business Begin Thinking About Buy/Sell Agreements

Buy/Sell Agreements are an integral part of the on-going operations of your business and should be created in the formation stage of your business. If you don’t have a Buy/Sell Agreement in place, it is never too late to establish one.

Once your company has established a Buy/Sell Agreement, it is very important to periodically review your agreement to make sure it keeps current with changes in your business value, your business management, and your personal needs.

slide8

The 2 Basic Types of Buy/Sell Agreements

Entity Plan

The business agrees with each owner that upon death, disability, or retirement of any owner, it will purchase that owner’s entire interest at an agreed price.

Cross-Purchase Plan

The remaining owners agree to purchase the withdrawing owner’s entire interest at an agreed price. It is also possible that individuals who are not currently owners may be parties to the agreement.

slide9

How Does a Buy/Sell Agreement Provide Cash For My Business Interest?

  • There are certain ways a business can accumulate cash to purchase the business interest of an owner:
  • Sinking Fund – Dollars are accumulated over time and are earmarked for purchasing the business interest
  • Borrowing from Lender – Buyer receives funds for purchase from an independent party
  • Installment Sale – Buyer pays for business interest over a certain amount of time
  • Current Cash Flow/Earnings – Dollars for purchase are made out of business profits
  • Life Insurance – Insurance policy owned by each buyer to fund a purchase of co-owner’s interest
slide10

Which Method of Funding Works Best?

  • Life Insurance is a preferred funding method for Buy/Sell agreements for several reasons:
    • The cash value of the life insurance may be used for lifetime buyout due to retirement or disability
    • Cash from insurance proceeds are received tax-free by the person selling their business interest
    • Cash proceeds are available exactly when needed
    • Life Insurance provides tax advantages for the remaining owners
    • Life Insurance strengthens the credit position of the company
    • The leverage of life insurance cost is pennies on the dollar
slide11

What is Needed to Set Up a Buy/Sell Agreement?

  • Decide what you want to happen to your share of the business
  • Agree on a value of the business that is fair to both the buyer and seller
  • Get help from an attorney, tax advisor, and insurance agent to properly structure and fund the agreement
  • Annually review the agreement to make sure objectives are still being met and that your agreement is adequately funded
slide12

How We Can Help

We work with you and your advisors to help make sure your

Buy/Sell agreement is properly structured and funded.

For more information or to schedule a review of your Buy/Sell agreement, please contact:

Ricke & Associates

425 Bank Street, P.O. Box 906

New Albany, IN 47150

Phone: (812) 944-4461, 1-888-537-4253

Fax: (812) 945-1328

www.ricke.com

Ricke & Associates cannot give legal or tax advice.