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Should Your Business Have a Buy-Sell Agreement?

There are a number of advantages to having a buy-sell agreement for your Michigan business. Some of the most important are as follows:

  1. Creating a Market for Selling Partner’s Interest. When a buy-sell triggering event does happen such as the death or disability of an owner, there is an automatic market for selling that owner’s interest in the business. The importance of this cannot be overstated since it can be difficult to locate buyers for interests in closely held companies. Without a buy-sell agreement, it might be possible to sell the interest of a deceased or disabled partner only at a bargain basement price.
  2. Establishing a Transition Plan. Having a buy-sell agreement allows the owners to plan in advance for a smooth transfer of the business when an unexpected triggering event occurs. This allows the business to continue operating and growing in an organized fashion while at the same time limiting disruptions to customers in what will likely be a very hectic and difficult time.
  3. Generating Funds for the Selling Partner and/or His or Her Family. The proceeds from the sale of a business interest under a buy-sell agreement can be a life saver for the deceased or disabled owner’s family. In the event of the business owner’s death, buy-sell proceeds can be used to defray certain estate-settlement expenses such as death taxes and administration costs. Also, part of the proceeds can be allocated to help pay living expenses of the deceased partner’s family. If the partner is disabled, the proceeds can be used to pay the living expenses for the entire family.
  4. Establishing Value for Estate Tax Purposes. The price set in the buy-sell agreement may be used to establish a valuation of a deceased partner’s business interest for estate tax purposes. There are certain requirements that buy-sell agreements must meet in order for the values set therein to be respected by the IRS, so for this reason alone (although there are many others) it is imperative to have a competent Michigan business lawyer prepare these agreements.

A buy-sell agreement is a tremendous tool that allows partners in closely held businesses to do advanced planning for their business and personal affairs in a way that can benefit all involved. But, preparing these kinds of agreements should not be a “do it yourself” project. It is imperative to have an experienced business attorney handle preparing these kinds of agreement.

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