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ASK THE EXPERTS
(excerpt from Gannett Poughkeepise Journal Sunday Paper)
Buy-sell pact secures all in partnership
Question: I read your Ask the Experts column
fairly regularly and would be interested in finding out about what a proper
buy-sell agreement between business partners should consist of.
Answer: Did you know that a typical business
owner spends 10 hours per day, about six days a week, investing in the
business in order to get it to a financially secure position? However, when
that business has partners, all that time and effort can go to waste if a
proper buy-sell agreement is not developed.
I have a friend who was developing that plan. The partners
were not only developing that plan, but also the mechanisms for providing
the funds needed to make the purchase of the other partner’s interest.
Those types of agreements are really for many situations, including owners
becoming disabled, retiring, divorcing or having an overall desire to sell
their interest.
Even with everything he was doing to develop the appropriate
plan, timing was not on his side. Unfortunately, my friend’s partner
passed away in the midst of this process and basically before anything was
finalized. To this day, my friend is now working with the partner’s
spouse who does not provide the same level of expertise, but is receiving
the same compensation. A properly developed and funded buy-sell agreement
can prevent that.
Price is determined
A typical buy-sell agreement provides that the surviving
business partner will purchase the deceased or withdrawing partner’s
percentage of ownership for a determined purchase price to be paid
according to a pre-determined formula and time schedule.
One of the most important items to address is providing the
mechanisms to provide the funds for the purchase. Many business owners
handle this funding by purchasing "first to die" policies which
pay a death benefit upon the death of the first partner. These agreements
provide assurance that the business will be able to continue in a
successful manner, along with security and comfort for the surviving owners
and heirs.
If you are interested in a sample buy-sell agreement you can
consult your attorney or even the Internet. If you do a search on
"buy-sell" you can get further information and download sample
agreements by state, which will take into account the different state laws.
Deborah Bailey-Browne is head of the accounting firm of
Deborah Bailey-Browne CPA & Associates in Wappingers Falls.
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