Why a Buy/Sell Agreement Matters
What’s Closely-Held Business?
The majority of businesses created in the United States every year are small business. Businesses consisting of 500 or fewer employees are generally closely-held. The term closely-held means a business entity’s shares are held by a small number of stockholders. Stockholders typically have a common interest in the company and the shares of stock are generally not traded in the public stock market. Closely-held businesses can take any form, LLC, Partnerships, or C-Corporation. Determining the value of a closely held corporation is often a challenge.
Major Concerns of Closely-Held Small Business
Perhaps the greatest issues facing Closely-held businesses concerns succession and the need for a buy/sell agreement. Buy / sell agreements are used by sole proprietorships, partnerships and closely held corporations to smooth transitions of ownership when a partner dies, retires, or exits the business. The two most common types of buy/sell agreements are:
- In a cross-purchase agreement, the remaining owners purchase the shares of the business at a predetermined price.
- In a redemption agreement, the business entity buys the share of the business.
Buy/Sell agreement can be funded with life insurance. The agreement requires the business shares be sold to the company or the remaining members of the business according to a predetermined formula. This is not the only way a Buy/Sell Agreement is created and these agreements are tailored to the business owner’s and their needs. The use of Life Insurance is the most common method.
Taking the time to plan today can save both you and your company a tremendous amount of uncertainty down the road. Death, divorce, and retirement are triggering events that will certainly occur in most businesses. Having a plan in place is essential to the long-term survival of any business. Schedule a review today!
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