Funding Buy Sell Agreements

There are a number of ways to fund a buy-sell agreement:

• Cash on hand

 Unfortunately, cash (surplus cash!) is not always available when it’s needed most and depending on your business, the amount may be substantial.

• Sinking fund

Think of this as a savings account. With this method, money is set aside for the eventual purchase of the business.

It’s a little more certain than hoping to have cash on hand, but what if something happens before the money you need for the buyout has accumulated?

• Borrowed funds or installment note

 Another option is to borrow funds from a bank or from the selling owner to purchase the business.

However, the death, disability or retirement of a co-owner may affect the ability to obtain credit from a third party.

Borrowing the money from the seller through an installment note is often used as a back-up plan, when used as a primary method of funding a buyout it raises many concerns.

Can the family afford to receive the buyout funds over the installment period?

What happens if the business cannot sustain itself with this new debt?

Will the family receive the whole buyout price?