Buy/sell agreement funding
Buy/sell agreements provide for the transfer of the ownership of the business in different circumstances death, disability, retirement or disagreement. At death or disability, for example, the remaining owners may not want to be in business with the deceased owner’s heirs or the non-active disabled owner. As well, the heirs or disabled owner may prefer to receive the value of the deceased owner’s share of the business in cash. If an owner retires, an agreement paves the way for business as usual. If owners have a falling out, a buy/sell agreement will enable the business to continue or be “wound up” in an orderly fashion.
A buy/sell agreement should deal with:
- Who will buy the shares;
- What the terms of the sale will be;
- When the sale will take place;
- Where the money to buy the shares will come from; and,
- How much the purchase price of the shares will be.
Proper funding should be in place to ensure that money is available to buy the shares of a deceased or disabled owner, should the event occur. Life insurance provides the necessary dollars at a far lower cost than borrowing to fund a buy-out. Funding the buy-out directly from cash flow can be difficult as the loss of the owner has probably already placed strains on the cash flow of the business. The best alternative is to be prepared with life insurance.
The goal is simple: satisfy all parties so the business can get on with business. Although a buy/sell agreement is a legal document, it still needs to be properly funded. If it isn’t, an unexpected crisis could cause serious financial concerns for the business and its owners. A properly funded buy/sell agreement provides access to adequate funds to facilitate any share purchase obligations contained within the agreement.