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Understanding Buy-Sell Agreement

Secure your business's future with a Buy-Sell Agreement—your essential safety net in times of unexpected changes.

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What is a Buy-Sell Agreement?

A buy-sell agreement is a contract that helps assure the continuation of a business by obligating the company or co-owners to buy, and obligating you or your estate to sell, the business interest at the occurrence of specified events such as your death, disability, withdrawal or retirement.

Drafted properly, a buy-sell agreement will help you set the value of the business for federal estate tax purposes and may reduce the chance of valuation disputes with the IRS.

What Is the Purpose of a Buy-Sell Agreement?

A buy-sell agreement can help business owners maintain control over who can partner with them in the future, and it can help to mitigate the possibility of bad feelings added to already difficult circumstances. Consider these examples:

  • Failing to plan for the disposition of the business at the owner's death, disability, retirement or withdrawal.
  • Losing a business partner and finding yourself co-owning with someone you find disagreeable, inexperienced or poor at making decisions.
  • Your business partner wants to leave the business and demands more money than you think the company is worth.
  • Part of the business is transferred to family members who want to take the profits without doing any of the work.

Foreseeing possible business complications and charting how to navigate them can make for smoother operation and help to increase the probability that the business will succeed over the long term.

Advantages of a Buy-Sell Agreement vs. a Will

Leaving a family business to your children at your death through will provisions may cause problems. A disgruntled heir or a dissatisfied spouse may dispute your will. Often, part of the business ends up in the hands of inactive heirs who can add little to the business but who want income equal to working stockholders.

The result could lead to an increased probability of business failure and family discord. Most importantly, a will cannot address the central problems created when you, as the business owner, die or become permanently disabled.

A properly funded buy-sell agreement helps assure:

An orderly transfer of the business to the one heir who will be a working stockholder
Avoidance of conflicts between two heirs with each owning 50% and only one of them working in the business
Heirs receive the fair market value of the business as an inheritance
Value established in the buy-sell agreement is binding on the IRS for federal estate tax purposes
Continuity in management provides stability for customers, staff, creditors and investors

Which Businesses Can Benefit from Buy-Sell Agreements?

They may be used in businesses such as restaurants, medical practices, family farms, start-ups and just about any partnership or business that's directly run by the owners.
shaking hands on a deal

How to Structure a Buy-Sell Agreement Contract

Buy-sell agreements can be structured to help meet the needs of both the business and the owners, taking into consideration tax implications and individual goals for the transfer of the business. In order for a buy-sell agreement to be effective in setting the value for estate tax purposes, the agreement must:

  • Be a bona fide business agreement
  • Not be a device to transfer the business to family members for less than full and adequate consideration
  • Have terms comparable to similar agreements entered into by persons in an arm's-length transaction
  • Be valid and enforceable under state and/or federal law
  • Be binding on the parties during life and at death
  • Contain a formula for determining the price of the property when one of the parties dies or be based on an independent appraisal completed after death
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Why Western & Southern?

The development of a buy-sell agreement of your small business will contractually require the purchase of life insurance, so you will want to partner with a company known for its financial stability. Western & Southern is a 500 company with a heritage of more than 130 years of financial strength that can help you build the financial security of your business and assure its continuation. A knowledgeable financial representative is available to help you.

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IMPORTANT DISCLOSURES

1A Buy-Sell Agreement identifies actions to take in the event a co-owner dies, is forced-out or chooses to leave the business. An attorney can assist with the Buy-Sell Agreement to ensure it is legally binding and a financial representative can assist with product selection. Each business owner purchases a life insurance policy on each of the other owners. When the owner dies, the surviving owners use the death benefit to purchase the deceased owner’s share of the business. Products issued by The Western and Southern Life Insurance Company and Western-Southern Life Assurance Company and other life insurance member companies of Western & Southern Financial Group can help meet these needs.

Members of Western & Southern Financial Group and their agents do not provide tax or legal advice. Please contact your tax or legal advisor regarding your situation. The information provided is for educational purposes only.