Is Your Buy/Sell Agreement in Place?

Did you know that three of America’s Founding Fathers died on the Fourth of July? While the passing of John Adams, Thomas Jefferson, and James Monroe on America’s birthday may sound incredibly patriotic, it is mere coincidence.  All foreshadowing aside, today’s experts have notoriously named Independence Day as the most dangerous day of the year.  Due to an abundant number of car crashes, swimming incidents, and firework accidents, the Fourth can be risky to brave without taking proper precaution.  As a business owner, the thought of death may bring added anxiety.  Often a daunting topic in a business owner’s mind is succession planning.  While a gloomy topic, business succession plans are important for all business owners to consider.  Although this can be maneuvered in multiple ways, a buy/sell agreement could be a good solution for your business.

What is a buy/sell agreement? A buy/sell agreement is a contract between the owners of a closely held business to continue the operation of the business at the passing, disability, or retirement of one or more of the owners.  It is possible for the owners to fund this out-of-pocket if their liquid assets are sufficient to buy out each other’s interest in the business.  However, more commonly, buy/sell agreements are structured so that the proceeds of a life insurance policy (or disability policy) owned on each of the owners’ lives can be used to buy out the other owner’s family (or the owner) at death, disability, or retirement.

There are several benefits to implementing a buy/sell agreement, such as:

  • Valuation of the business – If properly structured, a buy/sell agreement establishes a fair market valuation of the business for estate tax purposes which is binding by the IRS. This can potentially lead to tax savings assuming the value of the business is likely to appreciate over the life of the business owner.
  • Liquidity – Buy/sell agreements guarantee a seller is in the market when the owner is ready to relinquish their portion of the business. Along the same lines, in the case of death, the agreement will provide liquidity to the decedent business owner’s estate.
  • Business continuation – The agreement provides for business continuation and the corresponding goodwill among existing clients of the business. Clients of the business will be grateful for the smooth transition and continuity that a buy/sell agreement provides.

As a business owner, you will inevitably face many hurdles that are unique to your situation and business.  Instead of avoiding what may seem like an unnerving topic, face it head on and make sure things are buttoned up for the future.  There is no time like the present… the most dangerous day of the year is just around the corner!

Kristina Caragiulo, CFP® is a Senior Planner who joined the BDF team in July of 2015. As a Senior Planner, some of Kristina’s responsibilities include providing analysis to clients in the different areas of financial planning, maintaining client relationships, and trading and rebalancing client investment accounts. Kristina received a Bachelor of Science degree in Agriculture and Consumer Economics with a concentration in Financial Planning from the University of Illinois at Urbana-Champaign. She is a CERTIFIED FINANCIAL PLANNER™ professional.