Buy-Sell Agreements Are Critical Estate Planning Tools
If you are a business owner, your business likely represents a substantial portion of your net worth. Ultimately, your share of the business may very well comprise the most significant portion of your estate when you die. If you are a sole proprietor or are otherwise the sole owner of the enterprise, of course, the business will pass at your death in the manner you direct (assuming you have properly planned your estate!) If you have partners, or if you are a shareholder in a closely held corporation, however, it is critical that you have a buy-sell agreement in place. The buy-sell agreement will govern how your share of the business is to be disposed of, and will also set the price for which your share will be sold. It can also direct how the purchase of your share is to be funded. As Robert Cavanaugh outlined in an article that he authored on this subject, a properly drafted buy sell provides several significant advantages to business owner:
- The agreement in effect creates a market for an asset for which there might not otherwise have been one, enabling your estate to realize greater value from your share of the business.
- Allows the surviving members of the business to avoid becoming business partners with the deceasedd owner's heirs, who may not share the deceased's interest in the business or his or her goals and vision for the business.
- Establishes a price for your interest, and possibly helps to avoid costly litigation over the valuation of your share of the business.
- Enables your estate to very quickly convert an illiquid asset - your share of the business - into cash.
- Can be funded through the use of life insurance, thereby assuring that there is a ready, properly funded purchaser for your onership interest.
