Exit strategies should be considered when a new business is formed. An exit strategy provides a procedure for buying out an individual’s ownership in the business if he or she decides to sell his or her interest in the company as well as if he or she becomes incapacitated or dies. Without a properly created exit strategy, an interest in the business may be freely sold or inherited by heirs of a deceased owner.
Right of First Refusal
A right of first refusal can be used to require an owner of a business who wants to sell his or her interest to existing owners first, under the same terms and conditions offered to a third party purchaser. Rights of first refusal typically require the third party purchaser to have enough capital or credit to buy the interest in the company as well. However, if the other company owners or the company itself does not purchase the interest from the owner who wishes to sell, the interest can then be sold to a third party.
Buy-Sell Agreement
A buy-sell agreement is a contract between a business and its owners where the company usually holds life insurance as well as disability insurance on the owners. Upon an owner’s death or disability his or her interest is purchased with the disability or life insurance. Any buy-sell agreement should be carefully considered in each individual owner’s estate plan as it may have unintended tax consequences.
