Benefits of a Small Business Buy-Sell Agreement
A buy-sell agreement, also known as a buyout agreement, is a legal contract between business owners that governs what happens if a partner dies, retires, or otherwise leaves the business. A buy-sell agreement benefits the business owners, their families, and the business itself. It is one of the most important business documents when starting a small business in Phoenix.
Below are seven advantages of having a small business buy-sell agreement in Phoenix.
1. Guarantees a Buyer and Price for Your Business Interest. A buy-sell agreement provides a known buyer and a guaranteed price for the business following your planned (or unplanned) departure. The contract should specify who will buy the departing owner’s share of the business, under what circumstances, and at what price. This means that you will not have to search for a buyer at the time of your exit. It protects the business from a forced fire sale, where the business shares will be sold quickly and at a discount. Furthermore, the buy-sell agreement ensures that the company will not end up in the wrong hands, such as an angry ex-spouse, former business partner, or unprepared heir.
2. Provides Estate Liquidity. A properly funded buy-sell agreement can ensure that there is sufficient cash in your estate to cover state and federal taxes, debts, and other settlement costs. Your heirs will not be forced to quickly sell your business shares as obligations become due. Having estate liquidity help relieve stress for grieving family members.
3. Establishes a Fair Business Value for Estate Tax Purposes. Setting a fair business value for shares in advance allows you to plan how your estate tax liability will be paid. If structured properly and certain conditions are met, the IRS will accept the fair business value in the buy-sell agreement.
4. Avoids Conflict Between Surviving Owners and Heirs. Creating a buy-sell agreement gives you and your business partners the opportunity to discuss and answer questions, such as what happens when one of you dies or decides to leave the business. If there is no plan in place, it can be difficult to reach common ground when business owners separate, and there is an increased probability that the business will fail and there will be family discord.
Surviving owners’ and heirs’ interests are often conflicting. Heirs typically want to receive the largest amount of cash from the business. While surviving business owners will often want to continue business operations without interruption and keep liquidation costs to a minimum.
5. Provides Greater Security for Retirement. Through a buy-sell agreement, a business owner can ensure that they will receive fair compensation when they exit. You will know in advance how much money you will receive at retirement and when you will receive the funds. The guaranteed price in the agreement allows you to plan for retirement without having to worry about depending on the business for ongoing support.
6. Provides Stability for Business Operations. A buy-sell agreement ensures that there will be a smooth transition of the business operations in a manner agreed upon by the owners in advance of any triggering event. This has many benefits to the business. First, your employees, customers, suppliers, and creditors will feel more secure. They will be more likely to remain loyal to the business because they will know who will lead your company going forward. Additionally, it supports the business’s survival and ensures that a divorced spouse or unprepared heir will not unexpectedly take over part of the business.
7. Improves Access to Credit. Banks and other lenders may be more comfortable extending credit if they know that the future of your business is secure, and can continue to meet outstanding loan payments.
Do You Need an Attorney to Create a Buy-Sell Agreement in Phoenix?
It is not required to have an attorney create or review your buy-sell agreement, but it is highly suggested. A business planning attorney will ensure that the document is comprehensive and drafted correctly. If you make mistakes or leave loopholes when making a DIY buy-sell agreement, you could miss out on the benefits listed above. Nicole Pavlik is a skilled attorney with years of experience helping Phoenix small businesses.
Your Phoenix Business Planning Attorney
If you have questions about buy-sell agreements, you should contact a Phoenix business planning attorney. Nicole Pavlik is an experienced business planning attorney based in Phoenix, Arizona. Call Nicole Pavlik Law Firm today at 602-635-6176 to schedule a free consultation and discuss your business planning needs.