When discussing the complexities of business continuity planning, the buy/sell agreement may be the most critical topic. A buy/sell agreement is designed to help guarantee a reward for you and your family when an owner exits the business. A buy/sell agreement is a contract between business owners, ensuring some value in the company even if something personally happens to one party: divorce, death, disability, etc. An adequately designed agreement creates a mechanism to buy out another owner's interest in the business, establishes the price, and can even provide the cash that surviving owners will use for the buyout.
There are three basic types of buy-sell agreements:
- A redemption buy-sell agreement: The business entity as a whole agrees to purchase the interests of departing owners.
- A cross-purchase agreement: The individual owners themselves agree to purchase the interests of departing owners.
- A "wait and see" buy-sell agreement: A hybrid of the previous two agreements, this option provides flexibility about who the buyer might be (it could be the entity, the other owners, or both).
These agreements can be funded in various ways, including savings from the business (a sinking fund), a loan, or by setting up a life or disability insurance policy. Let's review them together if you'd like to understand more about how these funding approaches work.
Hopefully, the information we've provided about Business Continuity Planning has been helpful to you. Whenever you're ready to start thinking about your own business continuation needs, give us a call.