Founding Attorney
A buy-sell agreement is a contract stating when and how business owners can buy out or sell a co-owner’s share when the owner leaves the business. An effective buy-sell agreement should always include a plan to fund the ownership transition in the event of one of the owner’s deaths, retirement, or disability.
When deciding how to fund a buy-sell agreement, business owners will benefit from working with an experienced attorney to evaluate their financial situation carefully. They will also benefit from considering all the available funding options and ensuring their chosen method aligns with their long-term goals and capacity to manage potential financial obligations.
Funding a Buy-Sell Agreement in New York or New Jersey
Business owners have several different options when it comes to funding a buy-sell agreement. Working with an attorney can help you evaluate the pros and cons of each funding option. In many cases, businesses will use different funding methods to finance a buy-sell agreement. For example, they may use a mix of life insurance policies, loans, and cash reserves to ensure they have enough funding to complete the agreement transition.
Funding a Buy-Sell Agreement with Cash Out-of-Pocket
The purchasing owner or owners may choose to fund the buy-sell agreement out of their own personal savings or by selling some of their assets to pay for the sale. Funding buy-sell agreements with cash out of pocket is more common when a small business is involved or when the purchase price is relatively low.
Sinking Funds
Some businesses set aside cash reserves from their profits in preparation for a future ownership transition. However, many do not have enough cash flow to save a substantial amount of money, or the business has not existed long enough to accumulate the necessary funds over time.
Installment Payments
The owner who purchases the business may agree to make installment payments to the owner leaving the business. The purchasing owner can make monthly or yearly payments over time until they fulfill their obligation. This option can be difficult for the new owner, especially if the business has cash flow problems or is unprofitable for a year or more.
Borrowing Funding and Insurance Policies
The purchasing owner may obtain a business loan from a financial institution to fund the buy-sell agreement. The loan may use business assets as collateral. Finding a loan to fund a buy-sell agreement can be challenging, so working with an attorney to identify and secure a business loan can be helpful.
In other cases, business owners purchase life insurance policies for their co-owners. If one of the owners passes away, the remaining co-owners will use the death benefit from the insurance policy to buy out the deceased’s ownership shares. Similarly, owners may purchase disability insurance. If they become disabled and are no longer able to manage the company, they can use their insurance payout to fund a buy-sell agreement.
Contact a Business Succession Attorney in New York and New Jersey
Understanding the complexities of a buy-sell agreement and determining the most effective funding sources can be challenging. The experienced business succession attorneys at Merlino & Gonzalez are prepared to help you draft an effective buy-sell agreement that incorporates workable funding solutions. Don’t hesitate to contact us to schedule a consultation and learn more. We represent clients in Staten Island, New York, and New Brunswick, New Jersey.