Why You Should Never Have An Informal Buy-Sell Agreement

Why You Should Never Have An Informal Buy-Sell Agreements

Have you ever thought about what would happen to your business after an owner's death or disability? Often times business owners may discuss what they want to happen, but they do not take the necessary steps to lock these plans in. Trying to rely on these discussions after something happens can be one of the greatest threats to your businesses survivial.

How Do Informal Buy-Sell Agreements Work?

During the business owners lifetime, the multiple owners discuss some general terms for a future buyout situation, but do not put anything in writing. Some day in the future, one owner dies. Since prior verbal agreements were informal, all surviving parties must negotiate the terms at the worst possible times to negotiate. If the parties are unable to come to an agreement, then legal intervention is usually required for a resolution.

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What Are The Consequences Of Having An Informal Buy-Sell Agreement?

An Informal Buy-Sell Agreement is a verbal agreement between owners that is not legally binding. Without a formal written agreement, the buyer, price, and terms are all open to negotiation. To complicate the situation, the negotiations may include parties that were never aware of the verbal understanding

An Informal Agreement Is No Agreement At All

A written buy-sell agreement provides an orderly process for passing the business from one owner to another. The individuals agree in writing that the business interest will be sold for a negotiated pre-determined price, upon the occurrence of certain events. These events can include:

  • Death
  • Disability
  • Retirement
  • Divorce
  • Bankruptcy of the Owners

Benefits Of A Written Buy-Sell Agreement

  1. To the Business

    • Provides a smooth transition of control and ownership
    • Helps avoid ownership by unwanted parties
    • Helps avoid potential disagreements about business decisions
    • Reassures creditors, suppliers, customers, and employees of the continued viability of the business
    • Helps ensure the legacy of the business
  2. To the Owners

    • Binding on all parties
    • Locks in a Buyer for the business interest
    • Helps ensure your heirs will receive fair value when they sell
    • time frames and payment terms are agreed upon ahead of time
    • helps make sure the active owners retain control of the business

The Benefits of Using Life Insurance to Fund a Buy-Sell Agreement

I speak about this much more in depth in this post: Life Insurance Funding for Buy-Sell Agreements

Here are the key benefits of using life insurance to fund a buy-sell agreement:

  • cash is immediately available upon an insured owners death
  • tax deferred growth of cash value
  • death benefit is generally received income tax free
  • disciplended means of setting aside funds
  • policy cash can be used for a lifetime buyout or for financial emergencies

 Please take advantage of the risk management  resources I have to offer! If you are ready, feel free to request a life insurance quote on this site – here’s the link aaronpeacock.com/free-quote or call me at 828-434-3215 or email me at aaron@aaronpeacock.com to discuss business succession planning. It’s easy, fast, safe and always secure. 

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Aaron Peacock

Aaron Peacock

Hi, I'm Aaron and I'm a marketing representative for Federated Mutual Insurance Company - a Ward's Top 50 and an A.M. BEST A+ Superior rated insurance carrier. After my wife was severely injured in an accident involving a distracted driver, I've found one of my passions in life is to help educate people about the Danger of Distracted Driving and have started speaking to businesses in Western North Carolina on implementing the Federated Insurance DriveS.A.F.E. program. Click here to read more...

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