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Tips to Design a Buy-Sell Arrangement

When you own a business, you need to be thinking about the future. The truth is that one day you are going to want to retire; you need to know who is going to take over when that time comes. If you have partners, you need to plan for anything that may happen. One person may want out. A buy-sell arrangement will also protect your business if you end up getting divorced.

Since coming up with a buy-sell arrangement can be complicated, it is important that you take your time so that you are completely happy with the results.

Here are some tips to design a buy-sell arrangement for your business.

You need to have a buy-sell arrangement in place well before it is needed.

It is much easier (and less emotional) if you have your buy-sell arrangement in place before you need it. If you need to sell your business now or one of your partners want out, you might find yourself struggling to come up with a plan. Do it now before it becomes an emergency.

You need to have a clause for business valuation.

It is important that you come up with a clause that tells you how you are planning on evaluating your business since there are several ways to do so.

Some businesses use real estate appraisals while others depend more on the market value. Some validate their business by their income and assets.

Think about what type of structure you want.

A traditional cross-purchase plan is used when the other partners decide to purchase the one owner’s share if the event of death, disability, or they decide to leave. It works best when there are only two or three partners.

With an entity redemption plan (also known as a stock redemption plan with corporations), the business will buy the leaving owner’s share of the business. Usually, this is funded with a life insurance policy purchased by the business.

A one-way buy-sell agreement is used by sole proprietors when they want their child or spouse to buy the business when the time comes. It can also be used if they want one of their employees to buy the business.

A wait and see buy-sell plan is more often used with larger companies. It is a combination of an entity purchase and cross purchase plan. The business will get a chance to buy the leaving owner’s shares. If they don’t want to, the other owners can buy the business.

Don’t do it on your own.

Most businesses have a team to help them come up with their buy-sell arrangement. You should have your accountant and your lawyer help you through this process. You may also want to hire another professional who is not involved in your business at all. There are times when you might be too close to come up with a good arrangement.

If you don’t have a buy-sell arrangement, you need to start thinking about it now. If you wait until you need it, you might be too emotional to think clearly, making it hard to come up with an arrangement that works for everyone.

Don’t forget to include some information about how you plan to validate your business. Are you going to want an appraisal done or are you more concerned about the market value?

Because it can be complicated, you should get help. An experienced lawyer and your accountant will be able to help you get through this difficult time so you can make sure that your business will be protected!

Contact us for all of your legal needs. We will be glad to help you make sure that your business is going to be protected, after you are ready to retire.