At ERB, we understand the complexities that business owners face when looking to retire or transition out of their company. Beyond personal plans, they must consider the future for long-term employees who rely on the organization for their livelihood. Buy-sell agreements establish procedures ensuring a smooth transfer so buyers maintain operations and jobs stay intact.
Often arranged when businesses first form, these legally binding contracts manage owner exits by pre-arranging terms for existing partners or designated successors to acquire the departing owner’s shares. Absent these agreements, companies may dissolve if partners leave, or disputes arise over the company’s worth. For owners, buy-sell agreements provide exit strategies guaranteeing a market for their ownership stake. For remaining and incoming owners, they lock in rights and pricing formulas to purchase shares.
While copied from legal templates seem attractive for cost-cutting, custom contracts crafted with guidance from business advisors and financial planners better secure all parties. As employee benefits experts, ERB helps clients integrate buy-sell agreements with insurance policies like “key person” or “key employee” coverage to fund transitions. These tax-free death benefit policies provide influxes of cash when trigger events occur, enabling swift buyouts per established terms.
Proper funding ensures buyers can acquire shares without financial strain. We help owners conservatively value businesses annually to determine policy amounts. If a trigger event like death, disability or retirement occurs, the insurance money funds the ownership purchase at the latest valuation. Precise planning prevents disputes jeopardizing continuity.
For example, we assisted a Pasadena janitorial service with four equal partners, each owning 25 percent equity, to implement a buy-sell agreement funded by $2 million in key employee insurance. If any founding partner dies or exits, the policy proceeds facilitate the immediate buyout of their quarter-share per the contract. The remaining partners carry on operations undisturbed.
Beyond ownership changes, buy-sell agreements also protect companies from partner disputes or failures to meet obligations that could sink operations. They predefine triggers like failure to fund shares of profits, criminal misconduct, or disabling mental illness resulting in the compulsory purchase of the affected partner’s stake per the contract.
Advanced agreements also stipulate the relationship between the company and the departed partner to prevent competition. Non-compete clauses typically exclude former owners from working in similar businesses within geographic proximity for a defined period. Violations require the former partner to sell their shares back to the company. While strict, non-competes defend the company’s business interests in the wake of acrimonious splits.
Buy-sell agreements backed by adequate funding reassure owners that dedicated employees will retain jobs despite changes in leadership. At ERB, we combine our benefits and planning expertise to secure our clients’ legacies. Protecting continuity benefits all stakeholders. Let us help you develop strategies ensuring your life’s work continues to support the community for generations to come.
