Setting up Buy-Sell Agreements
WHAT IS A BUY-SELL AGREEMENT?
A buy–sell agreement, also known as a buyout agreement or business continuation agreement, is a legally binding agreement between co-owners of a business that governs the situation if a co-owner deceases or is otherwise involuntarily or voluntarily leaves the business. It is usually an approach used by sole proprietorships, partnerships and closed corporations to divide the business share or interest of a proprietor, partner, or shareholder.
A buy-sell agreement sets out the terms under which the interest of the disabled or deceased shareholder will be sold. It also contains provisions for the transfer of ownership when a co-owner of the business retires. A properly funded buyout agreement can assure creditors that funds will be available to pay their bills. It can also assure existing employees that the company will have the means to continue.
BENEFITS OF FUNDING A BUY-SELL AGREEMENT THROUGH LIFE INSURANCE
The most cost-effective method to fund a buy-sell agreement, in the event of the death of a shareholder, is through life insurance. In the event of a death, the proceeds from the life insurance policy can be used to purchase a portion of the deceased’s business interest.
There are several advantages of a funded buy-sell agreement. First, it ensures a market for the shares and guarantees a buyer for the shares of the business. Second, it provides the heirs of the deceased’s estate with a predetermined price for the shares.
For the surviving shareholders, this agreement protects them from unwanted shareholders such as family members of the deceased. The buy-sell plan also allocates the shares in a manner agreeable to all shareholders. Furthermore, a buy-sell agreement establishes the method to determine the price of the shares.
Overall, establishing a properly funded buy-sell agreement between shareholders, or for a successor owner, provides security and the knowledge that the business can continue to prosper even in the event of tragedy.
WHY HIRE PATROLA LAW TO HANDLE YOUR BUSINESS CONTINUATION AGREEMENT
Buy-sell agreements are complex in a nature and is also unique based on different situations. It is therefore recommended to consult the appropriate legal, accounting or tax experts for assistance in drafting a buy-sell agreement.
At Patrola Law, we can work with you and your other advisors to help determine a suitable buy-sell agreement and help ensure the appropriate insurance plans are in place to fund the agreement. Our team of Surrey BC lawyers are experienced in drafting buy-sell agreements and advising clients about the issues and options with respect to exit strategies along with tax, estate planning, and funding implications.