Hey, I’ve been hearing about buy-sell agreements lately and was curious if anyone here has experience with them? Seems like they’re important for partnerships, especially when a partner dies or leaves the business. Anyone know the types and how they work?
Yeah, I’ve dealt with a few. Basically, buy-sell agreements lay out what happens to a partner’s shares if they leave or pass away. It’s like a prenup for businesses. The shares usually get bought by the remaining partners or the business itself.
@Nash
That makes sense! Do they use life insurance to fund it or something? I saw that mentioned somewhere.
Wade said:
@Nash
That makes sense! Do they use life insurance to fund it or something? I saw that mentioned somewhere.
Yep, life insurance is often used to fund the buyout. When a partner dies, the insurance payout is used to buy their shares from the estate. Keeps everything running smoothly without any messy legal stuff with spouses or kids.
There are different types too. Cross-purchase agreements let the remaining partners buy the shares directly. Entity-purchase agreements, on the other hand, have the business itself buy the shares. Some people even use a mix of both.
@Finn
Interesting. How do they decide which one to go with?
Wade said:
@Finn
Interesting. How do they decide which one to go with?
It depends on what’s better for the business. Cross-purchase is great if the partners want to buy directly, but entity-purchase is better if the business has more funds to handle the buyout. They’ll usually sit down with an attorney and accountant to figure it out.
Just make sure to update the agreement regularly. You don’t want to end up with outdated valuations or someone being stuck with a super old price if they leave. I’ve seen that happen, and it’s a headache.
@Pip
Totally agree. If the market changes, and the agreement doesn’t reflect that, it could mean selling shares for way too low or way too high. Best to keep things updated.
Also, don’t forget that the agreement can limit who you sell to. You might want to sell to someone outside the business, but the agreement could restrict that. Just something to think about.
Corwin said:
Also, don’t forget that the agreement can limit who you sell to. You might want to sell to someone outside the business, but the agreement could restrict that. Just something to think about.
Yeah, good point. It’s great for keeping control within the business but can make things tricky if you’re looking to sell to someone new.