How buy-sell agreements can save your business

by Walter Daszkowski

Not all business owners are alike, but many if not most enjoy the authority and control of being their own boss. Having a proper business continuation strategy, however, is critical to protecting those years of painstaking work. Commonly known as a buy–sell agreement, these arrangements provide for the disposition of a business interest upon a specific triggering event, such as an owner’s death, disability, or retirement. Absent a buy-sell agreement, one of these events is likely to trigger numerous tax and other financial challenges for a closely-held or family business.

Consider an enterprise with several unrelated but active partners. Absent a buy-sell agreement, when one partner dies, his or her spouse typically inherits the business. In such a case, the surviving partners shoulder the load of the deceased partner on behalf of the former partner’s family, yet the spouse isn’t contributing and/or replacing the deceased partner’s day-to-day value. It typically doesn’t take long for resentment to build, and what used to be a close relationship is reduced to frustration and bitterness. In this situation, having a buy-sell offers benefits to both parties. The agreement normally sets a predetermined value or formula for the business interest that was agreed upon by all parties, thus expediting the transition of ownership. It provides a guaranteed buyer for the surviving spouse, and if properly funded, will provide the necessary liquidity.

There are generally two types of buy-sell agreements: entity purchase and cross purchase. In an entity purchase, the business buys the interest of the selling party; with a cross purchase, the remaining partners buy out the interest of the departing owner. The liquidity of the business, number of partners, and other items factor into which type of agreement is more appropriate.

One important thing a buy-sell cannot do in and of itself is conjure up funding. This is why insurance is often included in the overall plan. Absent insurance, it’s imperative that the purchasing entity has the liquidity to effect the acquisition, otherwise the buy-sell agreement is ineffective and all the problems remain. Insurance allows for the money to arrive at precisely the point of need, and coverage can be augmented so that not only is the purchase of the business funded, but additional liquidity is available to hire and train the replacement of the owner.

Navigating through the process isn’t difficult, but a good team of professionals will make a significant positive impact; this includes a business attorney and a certified public accountant, along with a business-focused advisor to get the funding in place.

As with many things, good planning will help you sleep better at night knowing the future stewardship and legacy of your business is secure and your family well taken care of.

Daszkowski, Tompkins, Weg &
Carbonella CPA P.C.
1303 Clove Road, Staten Island
718.981.9600 / wdcpa.com