A buy-sell agreement, also known as a business continuation plan or buyout, is designed to protect a business should it experience an unforeseen circumstance. If a co-owner wants to retire, wants out of the business, goes through a divorce or dies, a buy-sell agreement protect everyone’s interests, setting the price and terms for a buyout. These are binding contracts that dictate when owners can sell their interest, who can buy an owner’s interest and what price will be paid.
Buy-sell agreements can also be used to lower estate taxes in businesses when a co-owner plans to leave the interest to heirs who will remain active in the business. This can help a family business owner pass the business on to children or other relatives without burdening them with unnecessary estate taxes caused by an aggressive value of the business. Choosing a conservative price or valuation formula for the business is key for estate planning in the buy-sell or buyout agreement. The value of the ownership interest at can be legally set an amount considerably lower than its sales value at the time of death.
Buy-sell agreements are usually funded with life insurance because it is the only means of guaranteeing that death, the event which creates the need for cash, also, creates the cash to satisfy that need.