One of the key components of a business succession plan is a carefully crafted buy-sell agreement. A buy-sell agreement is a contract designed to facilitate the transition of the business should the owner die unexpectedly or sustain a disability. Its primary functions include the following:
1. Creating a market for a deceased owner’s business interest.
2. Legally binding the owner’s estate to sell his or her shares for a predetermined price to partners or shareholders (a cross-purchase agreement), to the business itself (an entity agreement), or both (a hybrid, or “wait-and see” agreement).
Life insurance is often used to fund a buy-sell agreement. The time to plan for business succession is now, before the need arises.