When Alexa and Jackson decided to go into business together, they decided to ‘do it right.’ They wanted all their paperwork, corporate structure, and so on to get them started on the right foot. But then their attorney mentioned to a Florida buy-sell agreement. They weren’t sure what a buy-sell did or what type of buy-sell agreement they needed. The following information could help anyone in this situation make informed decisions.
The Basics of a Buy-Sell Agreement
The name alone can confuse people. It sounds like this type of document buys or sells something. That’s not exactly the case. Consider the following pertinent facts:
- A buy-sell agreement is a legally binding contract between the owners of a business.
- Buy-sell agreements describe how a partner’s share of the business will be handled.
- You can negotiate them at any time in the life of your business. It’s usually best to prepare a buy-sell when you form your business.
- This type of agreement is useful when a partner dies, retires, gets divorced, becomes incapacitated, or declares bankruptcy.
- People sometimes call buy-sells by other names: buyout agreement, a business will, or a business prenup.
Business owners can choose from two different types of buyout agreements.
Entity-Purchase Agreement
With an entity-purchase agreement, the business purchases the business interest from the owner who is leaving or from the owner’s estate. Companies may buy life insurance policies on their owners with the company as the beneficiary. This ensures the company will have the money to buy the business interest.
The entity-purchase agreement form has some distinct advantages, including:
- Retired business owners can sell their business interest to increase liquidity during retirement.
- The estates of deceased business owners get an influx of cash.
- The transition time after someone leaves should run more smoothly.
An entity-purchase buy-sell agreement is not the only choice, however.
Cross-Purchase Agreement
Business owners may decide to use a different method of dealing with a departing co-owner. With a cross-purchase buy-sell agreement, the company does not buy out the person who is leaving the business. Instead, the remaining partners buy the interest.
Some key things to remember about cross-purchase buy-sell agreements include:
- The remaining owners can continue operating the business without worrying about new owners.
- A life or disability insurance policy on each owner can help fund the buyout.
- Proceeds from the life insurance policy may be tax-free and safe from creditors.
This type of buy-sell agreement may work best when there are few business owners.
The Hybrid
Business execs sometimes choose to combine elements of the other two types of business prenup into one document. This option gives people the flexibility to choose the provisions that make the most sense for their situation.
Your Business May Need a Florida Buy-Sell Agreement
With any legal document, using the right language is key. Make sure an experienced business lawyer drafts or at least reviews your Florida buy-sell agreement.
Attorney Richard Sierra at the Florida Small Business Center assists clients like you with business and litigation matters. As always, Our Goal Is to Help You Succeed™. For an appointment, you may call us at 1-866-842-5202 or use the contact form on our website. We represent clients throughout the State of Florida, including Coral Springs, Coconut Creek, Boca Raton, Delray Beach, Pompano Beach, Sunrise, Fort Lauderdale, Miami, West Palm Beach, Jupiter, Deerfield Beach, Stuart, Port St. Lucie, Orlando, Naples, Fort Myers, Sarasota, Tampa, and surrounding communities.