We’re willing to bet that if you’re a sole owner, you have likely been under the assumption that you don’t need a buy-sell agreement.
But this isn’t the case.
Here at Consolidated Planning, our decades-long journey has allowed us to learn first-hand what works and what doesn’t. We offer a process that provides the framework to uncover opportunities, maximize results, and put you on a solid path to achieving all that is important to you.
In this article, we’ll help you understand the purpose of a buy-sell agreement, how a unilateral buy-sell agreement works for sole owners, and how you can mitigate risks and better protect your business.
The Purpose Of A Buy-Sell Agreement
A Buy-Sell Agreement removes uncertainties when it comes to your business. Its function is to provide the necessary clarity and protection for you, your business, and your beneficiaries, ensuring a smooth transition of ownership.
Now, if something happens to you without a buy-sell agreement in place, your business will likely go to your spouse through your Will, by default. From there your spouse can decide to either sell the business or shut it down. The more likely option here is that your spouse will shut it down, sell it in a fire sale, or find a management team to run it as an owner would.
Keep in mind that some types of businesses need special licenses for the owner to operate that a spouse might not have. Also, does your spouse really want to manage the closure, sell, or management of the business if you’re gone? Probably not.
Lastly, think about your employees for a moment. What will they do without a clear path from you, even if you’re not here?
Now, what if we told you there was another option. Another choice that allows your spouse to realize the value you’ve created AND keep the business going?
How A Unilateral Buy-Sell Agreement Works
A unilateral buy-sell agreement helps you do just that. This agreement allows you to create your own buyer for your business and ensure that there is a market for the purchase, making the transaction happen according to your wishes.
Just like a Will provides legal direction for your family and estate should you pass away, a buy-sell agreement is essentially a Will for your business. When properly crafted, a buy-sell agreement will allow others to know how the business should be handled, including employees, and related assets of the business.
The buyer you would create is a legal entity, generally an LLC that you control. The ideal candidate for this is a business owner who:
- Doesn’t have a business partner
- Has one or more key employees (and most businesses have at least one key employee)
- A spouse who doesn’t want to run the business
The LLC you create would make you, the business owner, the 1% controlling owner and the key employee(s) the 99% non-controlling members of the LLC. The Unilateral Buy-Sell Agreement dictates the LLC to buy the agreed upon value from your estate if you die. This will outline the life insurance that goes to the LLC which the LLC must use to purchase the business from your spouse, from your estate.
Let’s say your business is worth $5M. Here, there is a $5M life insurance policy on the business owner which is payable to the LLC. You control the LLC while you’re living. When you die, your estate controls the LLC since it owns the 1$ controlling interest, which is likely your spouse or a trust.
The $5M policy is paid to the LLC, which in turn must use these proceeds to purchase your $5M business from your estate. Your executor of your estate will then receive the $5M of insurance proceeds in exchange for the purchase of the stock.
The $5M of business stock is now owned by the LLC. The key employees own 99% of this LLC, and your estate, spouse or trust owns 1% still. Usually the 1% of controlling interest is either given or sold to the key employees, so that in the end they key employees own 100% of the LLC, which owns 100% of the business.
A Unilateral Buy-Sell Agreement allows the owner to dictate how everyone will be taken care of. The spouse doesn’t have to make decisions on what you would want, and the interested key employees can run the business.
How A Unilateral Buy-Sell Agreement Works
Protecting your business means protecting the value you have worked so hard to build. While on the surface a buy-sell agreement may not seem necessary for the sole owner, that couldn’t be further from the truth.
With a Unilateral Buy-Sell Agreement, all parties involved – you, your key employee(s), and your family, have the best chance to succeed if anything should happen to you. Rather than creating turmoil and stress for your family, this agreement allows affairs to be wrapped up with a bow within 30-60 days.
Your spouse will have the value of the business secured and your new owners have clarity and capital to work with.
To learn more about protecting and growing your business, talk with an experienced planning professional at Consolidated Planning.
2024-173223 Exp. 4/2026
Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.
This material contains the current opinions of Neal Brincefield and Consolidated Planning only. These are not the opinions of Park Avenue Securities, Guardian, or its subsidiaries.
