As a business owner you are typically focused on the day-to-day operations of your company such as quarterly earnings, distribution conflicts and getting that bid in - not the consequences of a premature death or disability. But the short and long-term consequences of losing an owner should not, and cannot, be overlooked.

What is a Buy-Sell Agreement?

A buy-sell agreement is a legally binding contract that requires the sale and purchase of ownership interests in the event of the death, disability, or retirement of a partner or shareholder. It is a separate legal document that ensures that any ownership transition will occur as planned.

Usually these agreements are among co-owners, or between owners and the company itself. It is also possible that individuals who are not currently owners (such as a key employee or family members) may be a party to the agreement.

Outlining a Buy-Sell Agreement

There are two key elements in developing a buy-sell agreement. The first is ensuring that the company is valued properly and the second is deciding how the transaction is to be funded.

Business Valuation

Valuation not only assures that the business is transferred at a fair price but also helps in establishing a value for estate tax purposes. Determining the value of your company is not a simple process and a professional appraiser or your CPA should initially do this.

Updating the value of your company on a regular basis is also very important. This can be done by a simple agreement among shareholders at your annual meeting, or there may be a formula in place that determines the new value each year.

The Funding of a Buy-Sell Agreement

The second key element of a properly structured buy-sell plan is the funding mechanism.

A buy-sell that is funded provides that the funds will be available when they are needed to pay for the decedent's business interest. There are a variety of ways that a buy-sell plan can be funded, including installment payments, a sinking fund, a loan, and life and disability insurance. Each technique has its advantages and disadvantages. An unfunded buy-sell plan could create complications and delays, adding to the uncertainty that already surrounds the death or disability of a business owner.

Types of Buy-Sell Agreements

There are many types of buy-sell agreements including the entity purchase plan, cross-purchase, trusteed cross-purchase, wait and see approach, and if you have no partners and are the only shareholder, the key-person or one-way buy-sell plan. You should discuss with an attorney which type of buy-sell agreement would be appropriate for your particular situation.

Whether you are a small two or three person operation, or a shareholder or partner in a large corporation, having a properly structured buy-sell agreement is critical for the survival of your company. The loss of an owner can create a void in both management and operation and hence creates a significant challenge to business continuation. A properly designed & funded buy-sell agreement can help solve this problem and can help ensure that the business & the careers that depend on it will continue.

Paul K. Batt, CFS, CLU, ChFC, is director - Financial & Retirement Services of Minard-Ames Insurance Group in Phoenix and Tucson. He can be reached at
602-273-1625.