The death of a partner or major stockholder in a business can have devastating effects on both the business and the deceased partner’s surviving family. The business is concerned with gaining control of the deceased partner’s interest at a fair price so that it can continue operations without interference from the surviving family members. The family members are most concerned with receiving as much money as possible for their interest in the business and for capital that may be needed for estate settlement purposes. If nothing is written down by the partners, for what they each want to have happen in the event of an unexpected death, the business and their surviving family members will suffer greatly.
This is something businesses often neglect and overlook. It should be their number one priority.
Absent a written agreement, the competing interests of the business and the family members could lead to major conflicts, litigation and possibly the forced liquidation of the business. A buy-sell agreement can ensure that the business interest of the deceased partner will transfer in an orderly manner to the benefit and satisfaction of all parties. With a buy-sell agreement in place, the stability of the business for it clients, employees and investors (or creditors) is more assured.
Key elements of a buy-sell agreement include a mutually agreeable sales price and terms of the sale. The agreement needs to be funded in order to ensure that the capital is available at the time of the death of a partner. Life insurance provides a cost effective means of creating the capital necessary to buy out the interests of the family and establish a reserve for the business to use in order to continue its operations.
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