The Importance of Buy-Sell Agreements

Many people embrace their dream of owning and operating their own business outright or in a co-ownership arrangement with partners and/or shareholders. They diligently work over the years building the company with the day to day focus of running the company and maximizing the company’s value. Some day in the future they envision a planned exit of the business which may occur by transitioning the business to the next generation or selling it to a 3rd party. Their equity in the company may account for part or their entire retirement portfolio. In the meantime, their hard work in the business is what provides the income to fund their family’s needs and lifestyle.

But what if there is an unplanned exit? Is there an emergency plan in place for an unexpected and untimely exit of a business owner due to disability or death? Or perhaps one of the partners decides to leave the business and wants the other partners to buy out his interest in the company? What contingencies have been made to make sure the business does not go off course due to the unplanned exit of one of the business partners or shareholders?

The answers to these questions, like any contingency planning, are best addressed ahead of time versus after the fact when emotions are high and there are many unknowns and potential conflicts of interest. These issues are best addressed in a legal document called a Buy-Sell Agreement or as part of the Shareholders agreement. There are a few different ways to structure the agreement such as an agreement between partners or a formal agreement between company (entity) and each individual owner. What would happen to your business if something happened to you or your business partner?

• Do you have a buy-sell agreement in place?
• Is it properly funded?
• When was it last reviewed?

The Importance of Key Person (Key Man) Protection

Many businesses have a key person who is responsible for the majority of profits, or has a unique and hard to replace skill set such as Intellectual Property that is vital to the organization. An employer may take out a key person insurance policy on the life or health of any employee whose knowledge, work, or overall contribution is considered uniquely valuable to the company. The employer does this to offset the costs (such as hiring temporary help or recruiting a successor) and losses (such as a decreased ability to transact business until successors are trained) which the employer is likely to suffer in the event of the loss of a key person.

Who can be a key person?

A key person can be anyone directly associated with the business whose loss can cause financial strain to the business. For example, the person could be a director of the company, a partner, a key sales person, key project manager, or someone with specific skills or knowledge which is especially valuable to the company.