Understanding the Key Types of Buy-Sell Agreements

Situation: For many business owners, the focus is on today – running the business, managing day-to-day operations and expenses, and growing revenues. Most business owners can’t imagine a day when they will be unable to participate in their business. However, that day will arrive, and business owners need to plan for the continuation and control of the business. Without proper planning, death, disability, or retirement can create chaos for all parties involved. However, a well-written buy-sell agreement paired with life and disability insurance policies can help make the transition smoother.

While buy-sell agreements are a cornerstone of business continuity planning, many owners approach them with uncertainty. Financial advisors play a key role in helping owners navigate legal, tax, and funding considerations. In this Counselor’s Corner, we will review some of the most common – and important – questions business owners tend to ask, including:

• Do I really need a buy-sell agreement? What are the benefits of a buy-sell agreement?
• What are the types of buy-sell agreements, and which is the best for my business?
• How will the buyout be funded?

Solution: Buy-sell agreements are foundational to sound business succession planning; yet the first question a business owner is likely to ask a financial advisor is, “Do I really need a buy-sell agreement? What are the benefits of establishing an agreement?” For most closely held businesses, the answer is almost always “yes”, you should have a buy-sell agreement because of the following benefits: