For most small business owners, the biggest asset they own is their business; therefore it is critical that they begin estate planning early on to address their business ownership. If you own a small business as a sole proprietor, you have several estate planning options to handle the future of your business – such as passing the business along to children, selling it to someone outside the family, or simply closing up shop. But what if you own a business as a partner?
Many partnerships are set up with a buy/sell agreement, also known as a buyout agreement. A buy/sell agreement is a contract between business partners that specifies who can buy a partner’s share of the business upon a specified triggering event. It also establishes a method of determining the fair price for the partner’s stake. The triggering event is spelled out in the buy/sell agreement and can include retirement, incapacitation and death.
A buy/sell agreement should:
- Provide a way to establish the value of the business for estate planning needs;
- Specify the triggering events in which the agreement can be used; and
- Specify the payment terms.
How does a business pay for the buy/sell agreement if a partner passes away or for another triggering event? Often they apply for an insurance policy to provide cash flow for the continuation of the business, as borrowing funds to pay for a business buyout may be a problem if a key partner has just passed away.
A buy/sell agreement assures the continuity of ownership within the business and provides for fair treatment of both the buyer and the seller. This agreement is just one of the estate planning tools for a small business owner, and consulting with an estate planning attorney with small business succession experience is the best way to ensure your business can carry on without you while meeting your needs and goals.