When a business is owned by different partners, the company usually has an agreement in place to deal with the death, disability, or retirement of one of its shareholders. This agreement is known as a buy-sell agreement.
A buy-sell agreement allows for the smooth transfer of shares or other business assets from a departing or disabled shareholder to the remaining shareholders of a corporation. Some buy-sell agreements also have clauses that deal with the dissolution of a partnership. It can also protect the other shareholders in the event of a divorce or mental breakdown of a partner.
The main purpose of a buy-sell agreement is to facilitate any changes in the business and ensure that all parties involved in this transition are protected, especially the business.
ELEMENTS OF A BUY-SELL
A buy-sell agreement consists of three common elements:
- A triggering event
- Death
- Disability
- Living buy out (retirement or dispute)
- Marital breakdown
- Bankruptcy
- A valuation method
- A funding strategy
- Sinking fund
- Bank loan
- Payment by installments
- Life insurance
- Insurance funding
Tom Zaks is a seasoned portfolio manager and wealth advisor, a former business TV commentator, an experienced university lecturer, and the author of three wealth management books tailored to Canadian business owners. The above is an excerpt from his most recent book, The Business Owner’s Guide to Tax and Succession Planning.