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Why All Maryland Small Businesses Need a Buy-Sell Agreement
Without a Buy-Sell Agreement, the death or disability of an owner can leave surviving business owners or heirs faced with some very difficult decisions. Who will control the business? How will the family of the of the deceased or disabled owner become involved? What if the heirs want or need to sell their share of the business to pay estate taxes or provide liquid capital?
A Buy-Sell Agreement allows the owners to consider how they want the business to proceed under a variety of circumstances, spelling out the details and planning for the financial aspects of the transition. By doing this ahead of time, they can assure both business continuity and family security. The Buy-Sell Agreement can create a fair market for the closely held stock, allowing the family access to liquid assets to meet estate-related expenses.
The need for a Buy-Sell Agreement exists regardless of the type of business entity concerned, including:
Sole Proprietorships:
Potential Problems:
- Heirs lack skills to operate the business;
- Perceived lack of stability may destroy business's credit or erode customer or employee confidence; or
- Liquidation may provide only a fraction of the "going concern" value.
- Assures a willing and knowledgeable buyer to purchase the company;
- A structured plan can help alleviate creditor, customer and employee fears; and
- Allows heirs to receive a fair price for company.
LLCs or Partnerships:
Potential Problems:
- Company must dissolve on the death of a member/partner if there is no agreement otherwise;
- Remaining members/partners may lack liquidity to continue operations; or
- Deceased member's/partner's dependents may have immediate financial needs.
- A buy/sell agreement can assure business continuation on the death of a member/partner;
- Can provide liquid capital through life insurance payment; and
- Should provide for a quicker settlement of estate and a fair price for member's/partner's business interest.
Potential Problems:
- Existing stockholders may lack funds to purchase deceased's shares;
- There may be no other ready market for the shares; or
- Business instability.
- Provides necessary liquid funds to complete purchase;
- Assures heirs a market and fair price for ownership interest; and
- Prevents remaining owners from losing "control" of business.