WHY DO BUSINESSES USE BUY/SELL AGREEMENTS?
Do you watch Shark Tank?
If so, you might remember the episode with “Nuts N More”...a high protein version of peanut butter. That company, established by 3 friends, found early success with orders over $100,000 in less than 6 months! They came to the Tank to secure funding to keep up with the demand of increasing sales. For many businesses...this is a good problem to have!
SO HOW DOES THIS APPLY TO YOUR BUSINESS?
This was a company on the rise – yet finding cash to fund inventory, logistics, distribution & marketing was a big challenge.
What if they needed to pay out the cash value to a business partner that left the business? Who is going to lend money for that?
You may have already borrowed money to grow your business…will you ALSO qualify for a loan for your business partner’s share of the company?
Funding the cash buyout of your business partner can be a major problem – especially if they left involuntarily due to death or disability. This sudden challenge is not just on the family of the deceased: you no longer have someone helping you run the business and your partner’s family may have a significant part of their net worth in a business that you DON'T want to sell.
WHAT IS THE SOLUTION?
Buy/Sell agreements can be a popular solution to this potential problem. Typically these agreements are funded or “backed” by Life or Disability Insurance Policies.
(WORD OF CAUTION: If you are considering exploring this option for you business…these types of insurance products can be highly lucrative to the person that sells you the policy. Please make sure that they have your business & family’s best interest in mind. Unfortunately, these policies can be filled with “sales people” that just see big dollar signs.)
CONCLUSION:
If you are looking to protect your family & your business, and going to explore a Buy/Sell Agreement…you will want to seek the advice of a few professionals that should work together for your benefit:
Lawyer - Draw up the legal documents properly
Accountant/CPA - Help structure the payouts in a tax efficient manner
Financial Planner/CFP® - Help you with financial impact for your beneficiaries
Business Valuation Expert - Help you determine a fair price for buy out
Best
Pat
(Disclaimer: Buy/Sell Agreements are extremely complex and this blog was meant to be educational and NOT advice for you or your business. The details of how buy/sell agreements were purposely left out of this article. This is meant to inform and educate you on the concept and not to serve as an instruction on setting one up. Please consult a Financial or Business professional with expertise in buy/sell agreements if you want more information for your specific business.)