What is a buy and sell agreement? Should I have one?
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UPDATED: Jul 16, 2021
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A business can be crippled by the death of a partner, because the partnership is effectively ended by the death and needs to be reconstituted with the remaining partners and any new participants. But the interests of the deceased partner need to be bought out, just at a time when the business may be badly damaged by the loss of a critical member of the team and funds may not be available to pay for the deceased’s ownership interests.
A buy/sell agreement is a legal document that binds business partners to buy out the interest of a deceased partner at terms that are predetermined so as to allow the business to continue to be run by the remaining partners. The agreement is funded by life insurance policies on each of the partners with proceeds to be paid to the business for disposition according to the terms of the agreement. It is important that the agreement be carefully drafted by attorneys experienced in how to meet the exact requirements of the organization in question.
Similar arrangements may protect against long term disabilities that can sideline one of the main players in the business. A disability policy can provide needed funds in the event of such an incident and buy out interests of someone who will not be able to return to the business for a long period of time.
Disability income protection can also contribute to paying overhead expenses when an owner is incapacitated.