For many Southern Californians, a will and a trust could be all that is required for an estate plan. But if you own a business, your estate plan should include one more thing: A buy-sell agreement.
A buy-sell agreement spells out how your share of your business will be transferred upon a variety of scenarios, including your death. You also might hear it referred to as a business will, a business prenuptial agreement or a buyout agreement.
Typically, a buy-sell agreement is in place in sole proprietorships or in partnerships, but other types of businesses could also find them useful. An estate planning attorney can advise you whether your business could benefit.
A buy-sell agreement requires that your share in the business be sold back to the company or to your partners upon your death. There are two standard types of agreements: A cross-purchase and a redemption.
With a cross-purchase agreement, the surviving owners buy your share. With a redemption agreement, your business buys the share. The business partners also can choose to mix the two types and frequently purchase life insurance policies on the other to pay for the shares.
The buy-sell agreement also can include the criteria that will be used to value the business.
If you are sole proprietor, your estate plan should include documents stipulating what will happen to the business. You could choose to pass it on to family members or you might make an agreement with a longtime employee who wants to buy the business.
You’ve worked hard to build your business. Knowing it will be transferred properly upon your death should provide peace of mind.