Please note the information below is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the receipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of the information provided below should not be acted upon without specific professional guidance. Please call us if you have any questions.
The owner of a closely held corporation is naturally concerned about what will happen to the corporation upon his or her death. Although a corporation may exist in perpetuity, many practical problems must be solved to ensure the continuity of a business. A buy-sell agreement deals with some of the problems.
A buy-sell agreement is a contract providing for the sale of the corporate stock upon the happening of a specified event. Generally, this event is the death of one of the stockholders. However, the agreement can also provide for a sale upon the disability, retirement, or withdrawal of one of the parties.
A properly drafted buy-sell agreement should include:
- - Providing that upon the occurrence of a specified “triggering event”, owners are guaranteed that their interest in the business will be purchased,
- - Providing that the owner’s interest must be sold to the company, the remaining owners, or a combination of the two,
- - Providing a mechanism whereby the purchase price may be determined by market conditions in existence upon the occurrence of the event,
- - Providing a funding source, primarily through insurance policies, so that the liquidity needs of the business or its owners will not be onerous, and
- - Establishing a valuation of a deceased owner’s interest in the business for estate tax purposes.
Executing a carefully planned buy-sell agreement can assure owners in a closely held business that their interest in the business they built is secure regardless of any unforeseen circumstances. In many cases this can be accomplished without putting excessive strain on the business’s cash flow, ensuring that the business and its remaining owners continue to succeed as well. Other provisions to consider in a buy-sell agreement might be a non-compete provision and a provision for the termination of the buy-sell agreement itself.