Essential to your business the Buy-Sell Agreement
If you’re in business, chances are you will need to have a buy-sell agreement in place. A Buy-Sell Agreement protects a business from a range of financial problems in the event of one owner’s death, incapacitation, divorce, bankruptcy, or their retirement.
The Different Types of Buy-Sell Agreements
Why Your Business Needs a Buy-Sell Agreement
- Prevent Business Uncertainty – A buy-sell agreement can clearly detail how the business will continue should one of the co-owners pass.
- Funded with Life Insurance – An insurance policy structured correctly will fund the buy-sell agreement should it come into effect.
- Cost-Benefit Analysis – The benefits of a correctly-documented buy-sell agreement far outweigh the minimal costs involved.
- Avoid Liquidity Problems – A buy-sell agreement can ensure a smooth transition avoiding liquidity problems for the business.
- Retain Customers – With a buy-sell agreement ensuring a smooth transition, this can ensure that clients are not facing unnecessary disruption and the business can continue.
- Avoid Unnecessary Disputes – A buy-sell agreement can avoid unnecessary confusion and conflicts amongst surviving family members and co-owners.
Case Study – The Value of a Buy-Sell Agreement
The Situation
Ben and Scott run a successful advertising company in Singapore that they set up jointly 6 years ago. The company is currently generating $600,000 per year in revenue and both Scott and Ben plan to continue growing the business for many years to come. Scott and Ben are both married and wish to ensure that they have the right risk management policies and documentation in place should the unforeseen occur. Ben and Scott each own a 50% share of the business, which is currently valued at approximately $3,000,000 each.
The Solution
Scott and Ben take out a life insurance policy on each of their lives to the value of their respective share of the business, $3,000,000. They each pay the annual premium for the insurance policies. As their adviser, we work with their legal representative to ensure that the correct transfer agreements are put into place ensuring the longevity of the business should the unforeseen occur.
Scenario
If Ben were to pass, his estate would receive the life insurance proceeds and as per the transfer agreement, his share of the business would automatically transfer to Scott. Scott can then continue to run the business long into the future as a 100% shareholder.
Discuss how a Buy-Sell Agreement can protect your business
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