Hopefully you have read our two prior blogs discussing some of the benefits of having a Buy-Sell Agreement and how to value the business. This blog will explore where the money will come from to pay for the departing owner’s interests and the payment terms to be followed.
The three primary ways to fund the purchase of an ownership interest are by using the proceeds from an insurance policy, money from savings, or an installment payment plan. It is also possible to use a combination of these options. It should be noted that insurance policies bought pursuant to a buy-sell agreement are not deductible.
Using insurance policies is typically easier to implement when there are only a few owners. If there are numerous owners, it can get complicated quickly. Thus, it may be necessary to obtain professional help to determine if this is the best strategy for your company.
When using a payment plan as an option, it should be fair to both the buyer and the seller. The terms will have to be tailored to fit where the funds to purchase the business interest are coming from. If the proceeds of an insurance policy will be used for the buyout, the agreement should allow for the price to be in whole or in part as soon as the insurance proceeds are received. If personal funds are being used to fund the buyout, the most common payment terms include a lump sum payment, installment payments, a down payment plus installment payments, a customized payment schedule, or interest-only payments. A customized schedule could be anything from payment deadlines coinciding with bonus payments to anything else the parties agree upon. If the purchaser is making interest-only payments, the deadline for the purchase price being paid in full should be clearly set forth.
In sum, a buy-sell agreement can be drafted to meet your business’s unique needs. It is important to negotiate the terms as soon as possible while all the owners are on good terms.
The Swenson Law Firm is located in Sacramento County and we proudly serve businesses of all sizes from all over the State of California. Contact us today to learn more about how we can assist you with matters such as trademarks, defending lawsuits, business formation, contract negotiations, hiring employees, and protecting your intellectual property. With our years of complex business trial and litigation experience, we are an effective, efficient and affordable choice in representing you at the bargaining table and in the courtroom.