More than 50 percent of all small business owners are 50 or older, according to the U.S. Small Business Administration. That means many of America’s 28 million small business owners are coming to that point in their lives when they need to think about a transition for their businesses. Learn more about:
One Way Buy-Sell Agreement
Cross Purchase Buy-Sell Agreement
Entity Purchase Buy-Sell Agreement
A survey earlier this year by CNBC and the Financial Planning Association found that while 78 percent of small business owners intend to sell their businesses to fund their retirements, fewer than 30 percent have a written succession plan. That is not a recipe for success.
A good plan covers both the human resources aspects of a transition and the financial details, particularly if your succession plan is supposed to generate the income you will need during retirement. It’s also a good idea to have a succession plan if you intend to sell your business to change careers.
If you own all or part of a business, you may need a Buy-Sell Agreement. According to Cornell Law School, a Buy-Sell Agreement is a binding agreement used by sole proprietorships, partnerships and close corporations that governs what happens to an individual's ownership interest during the 5 D's:
The establishment of a Buy-Sell Agreement should be supervised and executed by an attorney, given the complexities that arise from different types of businesses domained in different states and governed by state specific laws. The most common types of buy-sell agreements are One-Way, Entity-Purchase and Cross-Purchase agreements.
As a sole proprietor you can help to ensure the continuity of your business after you have passed away by making it possible for your professional manager or competitor to take over your ownership in the business. A simple way to do this is with a One-Way (Unilateral) Buy-Sell agreement, under which your manager or competitor agree to purchase your business interests when you pass.
Under an Entity-Purchase or Stock Redemption Buy-Sell agreement, the buyer is the business. The business owners agree to sell their ownership interest back to the business if they become disabled or wish to retire. If there is a death of an owner, the owner’s estate is required to sell the deceased owner’s interest back to the business.
For partners who want to ensure their families will be compensated in the event they pass. Each business owner purchases a life insurance policy on each of the other owners. When an owner dies, the surviving owners use the death benefit to purchase the deceased owner’s share of the business.