When two or more people pool their resources to start up a business, one of the steps in a start up is to draw up a buy sell agreement. Typically, this agreement stipulates who does what to whom if something happens to one of the partners of the business. The contingencies, that come into play that needs to be addressed are
- the death of a partner;
- the disability of a partner;
- the retirement of a partner;
- the voluntary severence of the participation of one of the partners.
Each of these contingencies creates a major realignment of the relationships among the partners, all of which have fiscal consequences for and to the partners. The agreement that is forged to document the agreement the partners entered into to deal with these contingencies is usaually called a "Buy, Sell Agreement".
The agreement spells out how and at what frequency the business is valuated so each partner has a agreed value to their share of the business at all times. Most Buy/Sell Agreements assume that all partners to the business are "active" and contribute some form of hands on function, which is usually a condition of continued participation in the ownership of the business.
If a partner dies, the buy out formula of the agreement is triggered and the surviving partners must be in a position to buy out the share of the business from the estate of the departed partner. Since most start ups allocate all available monies to the operation of the business and death is unpredictable, life insurance is the preferred method of funding a buy/sell agreement that is triggered by a death. In other circumstances the parting partner is still alive and in most cases is capable of negotiating terms agreeable to every one.
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