What is a ‘buy-sell agreement’ and why is it needed in Florida?

What is a ‘buy-sell agreement’ and why is it needed in Florida?

On Behalf of | Oct 7, 2015 | Firm News

Previous posts here have discussed many forms of estate planning and how Florida residents may help direct the way their property is disposed of in case of incapacity or death. In many of these cases, we have looked at a testator’s personal or real property, and how that will be distributed. But, what if the person in question owns a business? What happens to the business or decedent’s share thereof when the person becomes incapacitated or dies? Especially if the ownership of the business is held in conjunction with other people, such as with shareholders in a corporation, or a partnership, owners may wish to consider a ‘buy-sell’ or ‘buyout’ agreement.

These agreements are sometimes called ‘prenuptial agreements for businesses.’ As with that family law contract, the purpose of the buy-sell agreement is to stipulate how the ownership interest in the business should be transferred if one of the owners will no longer be taking part in the business, whether by choice or circumstance. This type of agreement can be used in several different ways in an estate planning context. The agreement will often have a valuation formula that is to be used to determine the price of the business interest. It can also restrict the people or entities to which the ownership interest can be sold. Thus, a business owner who wishes his family members to benefit from the business can give some certainty to the sale price they will get from the buyout of the ownership interest, or even ensure that heirs get first crack at buying the into the business.

Further, the use of a buy-sell agreement can allow a business owner to mitigate the effect of any estate tax. The ownership interest in the business will be seen as an asset of the estate during probate, so a buy-sell agreement triggered by the owner’s death or incapacity may allow the ownership interest to be passed outside of the estate. Also, the valuation method in the agreement may help to reduce the applicability of estate tax in certain cases.

Buy-sell agreements can be used in conjunction with a trust, or other types of estate planning tools. Because every business’ situation is unique, and people’s wishes can vary greatly, business owners may wish to get more information about the estate planning options that are available.