Benefits of a Buy-Sell Agreement       

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Benefits to Heirs

  • Creates a qualified purchaser for the inherited business interest.

  • Establishes a fair price for the business interest.

  • Helps set the value of the business interest for the purpose of estate tax fillings, thereby helping the planning process and possibly reducing the estate tax obligation.

  • Provides cash in exchange for the business interest - a risky asset for heirs to hold.

  • Reduces the time needed to administer the estate - thereby reducing estate administration costs.

  • Provides the estate with the cash needed to meet estate taxes and estate administration costs.

  Benefits to Business

  • Increases likelihood that banks and suppliers will continue to extend credit lines.

  • Helps to assure employees that the business will continue despite the death of a key owner/employee.

  • Lessens the probability that customers or clients will seek other suppliers following death of an owner.

  Benefits to Surviving Owners

  • Assures the surviving owners control of the company because the heirs must sell to the firm and not to outsiders.

  • Provides funds to purchase the business interest held by the heirs.

  • Guarantees full management control by eliminating the possibility that the heirs will assume management positions for which they are not qualified.

  • Eliminates potential emotional conflicts between the heirs and the surviving business owners - conflicts that could impair the harmonious operation of the company.

  • Eliminates pressures on the surviving owners to help the heirs financially because they are also family friends, even though such aid might exacerbate the problems of a business which is struggling to adjust to the recent loss of a key owner-employee

 Conflicting Interests

At the death of the business owner, the interests of the surviving owners and the  heirs may be in conflict:

Interests of the Surviving Owners Who Are Also Employees

  • Received competitive tax deductible salary.

  • Build business for future growth.

  • Establish cash reserves.

  • Take long - term prospective in most decisions relating to the business.

  • Dividends ARE NOT relevant.

Interests of the Heirs Who Are Non-Employees 

  • Obtained ongoing income!  

  • Realize funds from business to paying estate costs.

  • Oust non family surviving shareholders employees whole are not "cooperating" with the heirs.

  • Dividends ARE relevant.

Conflicting Goals

In addition to different interests, the surviving owners and the heirs may have different goals:

Goals of the Surviving Owners Who Are Also Employees

  • Retained control.  

  • Realize long -- term growth in value of business.

  • Invest both business earnings  and borrowed funds in new products and services in order to fuel long -- term business growth.

Goals of the Heirs Who Are Non-Employees

  • Reduce risks and fluctuation in business income and business value.

  • Obtained cash for personnel needs.

  • Get "fair" price  for all or part of the inherited business interest.

 

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Copyright 2001 Kaplan Management & Insurance Services
Last modified: June 13, 2012