The Other Business Insurance: Buy-Sell Agreement
Design professionals and other professional services firms will understand the risk management needs met by professional liability insurance but often overlook the importance buy-sell agreements. If you are an owner, or co-owner, of a professional services business, or any other type business that wants to plan for success, you need to be aware of the benefits provided by the inclusion of buy-sell agreements in your risk management portfolio.
Photo: Partnership Agreement
What is a Buy-Sell Agreement? To put it plainly, if there is a life changing event that comes along for a business owner, a buy-sell agreement will help mitigate the financial and legal ramifications, and other headaches, that could arise from such an event. In some circles it is referred to as a “Business Will.” An owner or co-owner may die, get divorced, become permanently disabled or simply decide to retire. Whatever the case may be, this “Business Will” serves as a blueprint for the future, ensuring that the life changing event is just a hiccup for business and not a stroke.
The benefits of an affordable Buy-Sell Agreement can well outweigh its’ costs, answering questions like: How will a parting owner’s equity in a firm be divvied up between co-owners? Do the shares actually belong to his surviving family members if he dies? Is there even a business left if the owner dies or calls it quits? What if one co-owner wants to sell his stake in the business to someone the other co-owners would rather not do business with? The number of mucky situations that a business could be thrust into due to the lack of a funded Buy-Sell Agreement is endless.
The insurance feature of the Buy-Sell Agreement is there to help fund the agreed upon buyout when needed. It is not necessary to have a funded Buy-Sell agreement, but having it funded by a life insurance company can provide the financial backing needed to ensure the proper parties are bought out as agreed.
No matter the size or type of your business, a Buy-Sell agreement can be a valuable asset in your risk management portfolio. You could run a successful Architectural firm, engineering firm or law firm. It could be a sole proprietorship, partnership, limited liability corporation or a corporation. Doesn’t matter! Depending on the number of individuals who hold or could potentially hold a financial stake in the business, the need for a Buy-Sell Agreement increases exponentially.
So now that you are convinced a Buy-Sell agreement is a necessity, what are you going to do about it? Because of the different types of agreements, cross purchase, redemption, and hybrid, it’s recommended that a good amount of research is done and that a lawyer is consulted prior to execution of the agreement. Any experienced business or tax lawyer would be happy to draw up an agreement for you and your business. Once you have an agreement in place, don’t forget to see your Professional Insurance Agent to arrange for the funding of the agreement. Remember, the overall cost of having an agreement in place will seem like peanuts when compared to what a Buy-Sell agreement could potentially save you in time, money and headaches.
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