Janet and her sister Kate were the co-owners of a local business. After Kate suffered a fatal heart attack, her husband Tim received her ownership interest in the company.
Tim had no experience in running the business and had little desire to learn. When keeping up with his bills became a challenge, he decided to ask Janet to buy him out.
That turned out to be a problem for Janet. She didn’t have enough cash, since she’d recently invested heavily in expensive inventory. Janet applied for a loan, but the application was turned down because the company didn’t have the cash flow. Janet sold the inventory to purchase Tim’s share of the business, but the price she received was well below fair market value. The business couldn’t sustain the monetary loss and eventually folded.
If Janet and Kate had established a buy-sell agreement, this situation might have been avoided. A buy-sell agreement is a contract between business owners in which all owners agree that their ownership interests will be sold (or offered for sale) at a certain price back to the company, or to each other, when an owner dies. Often, the owners buy life insurance policies so they’ll have the cash to make the agreed-upon purchase.
Putting a buy-sell agreement in place is a smart planning strategy for closely held businesses with multiple owners. It will help ensure an orderly transition and keep the value of the business intact.
Client Profile is based on a hypothetical situation. The solutions we discuss may or may not be appropriate for you.
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