Three Steps to establishing a successful Buy Sell agreement

Have you ever wondered what would happen if, G-d forbid, your business partner died?

This is often not planned out, and the surviving co-owner ends up working with the spouse or other heir of the partner. This is not usually the ideal situation.

What is a buy-sell agreement?

A legal contract between 2 or more co-owners that guarantees a price and a buyer if something were to happen in the future.

Consider these three things:

  • Do you want to be in business with your partner’s spouse or heirs?
  • Do you want your partner’s heirs to lose that stream of income if something happens to your partner?
  • Do you want to deal with legal issues?

Without having a buy-sell in place, these are the issues that come up.

How does a buy-sell agreement work?

3 Steps:

1: Value

-How much is the company worth?

-Formulaic vs Process

-Have a valuation expert help and update the agreement over time as the business grows and changes (every 2–3 years)

2: Fund

-How is the agreement going to be funded?

-4 Ways to fund (can be done in combination):

  • Cash-flow
  • Borrow
  • Sinking fund
  • Life insurance

-Take into account future projections of the business when getting funding together to ensure you have enough if/when the time comes.

3: Type

-Two main types

  • Cross Purchase-Works well with fewer people involved
  • Entity Redemption-Ideal for business with multiple co-owners

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