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Buy-sell agreements are commonly used to fund agreements for transferring ownership interests in small businesses. They provide a company with financial protection by establishing a predetermined plan to sell a business in the event the owner retires, becomes disabled or passes away.
A buy-sell agreement allows the remaining owner or owners to acquire the interest of a withdrawing owner due to death or another specified event, such as disability or retirement. The agreement typically restricts an owner’s ability to transfer his or her interest and sets out the terms under which another owner or the business entity may acquire the departing owner’s interest.
The benefits of buy-sell agreements are numerous, including:
A marketplace is created for the shares of a closely held business, helping ensure that departing owners will receive adequate compensation
Life insurance funding agreements may also provide cash to pay other costs
Safeguarding against potential situations that could imperil the business or be harmful to owners and employees
Maintaining the long-term financial objectives of the company