Wednesday, November 18, 2015

The death or disability of a partner or shareholder of a professional practice or other closely held business or entity can cause hardship or the financial ruin of an otherwise solid business. A properly structured buy-sell agreement will enable the remaining partners, members or stockholders to continue on with the business and avoid costly litigation over disputes and money.

There are two main types of buy-sell agreements. The first one is the cross purchase agreement whereby the withdrawing partner or his/her heirs agree to sell his/her share to the remaining partners. The second type is the entity-purchase whereby the withdrawing partner or his/her heirs agree to sell his/her share to the entity. The advantages and disadvantages of each of the buy-sell arrangements will be discussed in detail in a forthcoming article.

If you died tonight, a buy-sell agreement could:

  • Guarantee a buyer for your share of the business.
  • Specify the payment plan or terms for the purchase.
  • Utilize life insurance to fund a buy-out.
  • Subject to I.R.S. rules the value of the buy-out might be binding for the estate tax.
  • Your spouse will be able to walk away from your business with cash in hand.

Methods of funding a buy-sell agreement

  • Cash:
    The cash method rarely works well because most people either have their money invested or they don’t have any.

  • Sinking Fund:
    The sinking fund method may not work if you or your partner die before a fund is accumulated. A sinking fund may also cause an accumulated tax problem for corporations.

  • Installment Payment:
    The installment method might work, but it could be disrupted by divorce, bankruptcy or some other unforeseen hardship.

  • Borrowed Money:
    This method might work if a bank is willing to lend the practice money while the practice is down one partner, but this method entails much risk and stress for all parties.

  • Life Insurance:
    In most cases, life insurance is by far the best method to fund a buy-sell agreement. The deceased partner’s share of the business will be bought out at full price for just pennies on the dollar invested.

For more information please contact

Nathan R. Lynch, Esq. at 603-756-4700

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