Alex and Mary, both in their mid-forties, had just celebrated the tenth anniversary of Consulting, Inc., their market consulting business. The next morning, before going to work, Mary suffered a heart attack while jogging and died later that day. Alex suddenly lost his long-time business associate. What’s more, after the estate was settled, he found himself with a new co-owner – Mary’s husband.
The result was chaos. Mary’s husband had little interest or experience in running the firm. He needed cash for living expenses and asked Alex to buy out his interest in the business. But because most of his assets were tied up in the business, Alex was short of cash. Unfortunately, Alex and Mary’s husband were left with little choice but to sell the company on short notice for just a fraction of what they had hoped for.
How could this fictional disaster have been avoided? A buy-sell agreement and proper funding could have saved their business while providing needed income for Mary’s family after her death. Buy-sell agreements lay out how ownership will change hands and how the transfer will be paid for in case of a co-owner’s death, disability or retirement. Typically, the agreement provides for the purchase of the departing shareholder’s stock by the surviving shareholders or the company itself.
A buy-sell agreement and its proper funding may achieve several goals: avoid liquidation of the business; facilitate an orderly continuation of the business; replace lost business income for a deceased owner’s heirs; set a purchase price that can fix the estate tax value of the decedent’s stock; and provide evidence to customers and creditors of the firm’s stability.
Buy-sell agreements can help protect your business and your family. Seek the guidance of a professional financial adviser who can identify the various issues and considerations that will help determine what type of buy-sell agreement makes the most sense for you.