Spring 2009 issue of Horizons

Raise Your Expectations CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

Implementing a buy-sell agreement can assure business owners that their interest in the business is secured in the event of unexpected future circumstances such as death, disability, retirement, termination of employment, attempted sale of an ownership interest to a third party, divorce or bankruptcy. If your business does not have a buy-sell agreement and it is something you would like to explore, please do not hesitate to contact us.

Typically, a buy-sell agreement provides that the remaining business owners or the business entity itself will buy the departing owners’ share of the business. In addition to specifying the circumstances that will trigger a mandatory or optional buyout, the buy-sell agreement also will state the price to be paid for the ownership interest, or alternatively, the buy-sell agreement will provide a formula for how that price will be determined. A buy-sell agreement usually takes one of three general forms: a redemption agreement, a cross-purchase agreement or a hybrid agreement. In a redemption agreement, the departing owner agrees to sell his or her interest to the business entity itself. The business entity is responsible for financing the purchase, which may be funded by using business capital, loans or insurance on the departing owner’s life. In a cross-purchase agreement, a departing owner agrees to sell his or her interest to the remaining owners. This format works best in a business with only a few owners. As the number of owners increases, this format can become complicated, especially if the financing of the sell is through life insurance, because it can require multiple owners to have multiple life insurance policies on each of the other owners. A hybrid agreement is a combination of a redemption agreement and a cross-purchase agreement. Typically, the departing owner must first give the business entity the right to buy the departing owner’s interest. If the entity refuses to buy, then the ownership interest is offered to the remaining owners. Often a buy-sell agreement is funded with life insurance. Life insurance proceeds can provide cash to buy a departing owner’s interest in a business without jeopardizing the future sustainability of the business.

Questions? Contact:

Rich Petrofsky, JD, LLM Partner Wealth Management Services Group 314.290.3487 rich.petrofsky@rubinbrown.com

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