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Business Continuation
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Closely Held Corporations: Corporate Buy Sell Agreements
Business continuation of a closely held corporation almost always requires a corporate buy sell agreement.
Business Continuation: The Problem Explained
The death of a stockholder does not legally dissolve a closely held corporation.
P roblems make the retirement of the deceased's interest in a closely held corporation a necessity.
A Corporate Buy Sell should always be considered.
More about the problem
The Solution
A properly drawn buy-and-sell agreement financed by life insurance.
Definition
A buy-sell agreement binds either the surviving stockholders or corporation, to purchase the stock of the deceased stockholder at a prearranged price set forth in the agreement and obligates the estate of the deceased stockholder to sell his stock to the surviving stockholders or the corporation.
As in the case of the partnership agreement, each stockholder's interest is valued at the time the buy-sell agreement is drawn up and periodically revalued.
Each stockholder is insured for the amount of stock interest owned, the insurance being owned by either the corporation or the other stockholders.
Upon the first death among the stockholders, the life insurance proceeds are used by the corporation or surviving stockholders, purchase the stock of the deceased from his or her estate.
The business future of the survivors is assured and the heir(s) receives cash instead of a speculative interest.
The Conclusion-
Life insurance is the best means of financing a business transfer
Any buy-sell or business continuation agreement is dependent upon the accumulation of a cash sinking fund.
Any buy-sell or business continuation agreement is dependent upon the accumulation of a cash sinking fund.
Analysis will show that all other available
financing arrangements are likely to be unreliable and inadequate.
The fact that the plan must produce the prearranged amount of cash at the time death calls for a fund.
An accumulating sinking fund requires time at an assumed rate of interest, to reach a stated amount. If death of the stockholder or partner occurs early, little would have been accumulated.
More about the conclusion
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