Protect Your Business with a Buy-Sell Agreement

Jun 22, 2016

The unexpected can always happen. That’s why, if you’re the co-owner of a business, you need to prepare for the possibility that you — or the other owner — won’t be at the helm one day. The fact is, either of you could die tomorrow. What would happen then?

When you enter into a buy-sell agreement, you face this issue head on. A buy-sell agreement is a legal contract between you and the company’s other owners. In it, you each agree that your ownership interest will be sold (or offered for sale), at a certain price, to the company or to each other when you die. Often, the company or the owners buy life insurance policies so they’ll have the cash to make any agreed-upon purchase.

Tax Advantages Buy-sell agreements offer more than simple protection for you and your family. You may also gain estate-tax benefits. Your estate can usually value your business interest according to the price or formula set in the agreement. This lets you plan in advance for what that value will be.

Buy-sell agreements can also help your estate avoid time-consuming and costly battles with the IRS. When an estate includes a closely held business interest, the IRS may see a red flag. The IRS wants to be sure that estates don’t come up with artificially low values for businesses in order to save taxes. If you have a buy-sell agreement in place, and follow all the tax law rules, the IRS is likely to accept your value.

What’s Your Interest Worth? The key to making the value in your buy-sell agreement stick is to make sure that it is a “fair market” price. If you and the other owners aren’t relatives, this shouldn’t be a problem. You’ll probably bargain with one another to get the best deal possible. However, if you intend to pass your interest in the company on to a child or other family member, the IRS may argue that you and your close relative didn’t negotiate a fair price. That’s why it may be best to provide in the buy-sell agreement that a qualified professional will value the company annually or at the time of the sale.

Our team of business valuation experts can help you plan for the future through a buy-sell agreement. If you have questions or concerns about your business, contact Jack Hagmeyer at hagmeyer@wvco.com

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