What Is Known as a Business Continuation Agreement
What Is Known as a Business Continuation Agreement: An Overview
As a business owner, it`s important to plan for unforeseen events that may impact the continuity of your business. One such event is the unexpected death or incapacity of a key business owner or partner. A business continuation agreement, also known as a buy-sell agreement or a business survival plan, helps ensure that your business can continue to operate even in the absence of a key owner or partner.
A business continuation agreement is a legal contract between business owners that outlines the terms and conditions for buying out the interests of a deceased or disabled owner. It provides a roadmap for how the business will be transferred or sold in the event of one owner`s absence.
There are two types of business continuation agreements: cross-purchase and entity purchase agreements.
In a cross-purchase agreement, each owner agrees to purchase the shares of the deceased or disabled owner`s interest in the business. The remaining owners divide the shares of the deceased or disabled owner among themselves, in proportion to their existing ownership stakes.
In an entity purchase agreement, the business itself agrees to purchase the shares of the deceased or disabled owner`s interest in the business. The remaining owners do not buy out the shares themselves, but rather the business does.
Both types of agreements can be funded either through life and disability insurance policies or by setting aside cash reserves.
A business continuation agreement typically contains the following elements:
1. Triggering events: The agreement outlines the specific events that would trigger the buyout process, such as death, disability, retirement, or resignation.
2. Valuation: The agreement specifies how the business will be valued in the event of a triggering event. This can include using a predetermined formula or hiring an independent appraiser.
3. Funding mechanism: The agreement outlines how the buyout will be funded, whether through life and disability insurance policies or cash reserves.
4. Restrictions on transfer: The agreement may include restrictions on transferring ownership stakes outside of the agreement, to prevent owners from selling their shares to someone who would not be covered by the agreement.
5. Dispute resolution: The agreement can include a mechanism for resolving disputes related to the buyout process.
Overall, a business continuation agreement is an important tool for ensuring the continuity of a business in the event of unexpected events. Business owners should consult with legal and financial professionals to create an agreement that addresses their specific needs and circumstances.
