Unexpected events happen in business, just as in all other aspects of life.The death, disability, retirement or “divorce” of business owners can jeopardizea healthy business or send it into a financial tailspin. That’s why it’s soimportant for the owners to create a buy-sell agreement that spells out whatwill happen under certain scenarios.
Buy-sell agreements cover, among other things, who buys, who sells, underwhat conditions, at what price, on what terms and how the transaction is funded.They allow owners to make these strategic decisions in advance, long before acrisis occurs. By setting forth the terms and conditions for buying out anowner’s interest, they eliminate or at least reduce the turmoil of a key risk tothe health of the business.
An effective buy-sell agreement can help the owners make a successfultransition, while maintaining the ongoing business operations and survival. Forexample, the two owners of a grocery business corporation signed a buy-sellagreement after their father, the company founder, passed away, and modified itseveral times through the years. When one of the owners accidently died, hisshares were purchased from his estate using life insurance proceeds, providingliquidity to his surviving spouse. In turn, the surviving owner was able tobecome the 100% owner of the company and eventually sold/distributed a portionof his shares to his children, who remained active and intimately took over thebusiness.
That’s a far better outcome than a deadlock or prolonged struggle for controlamong the surviving owner and the spouse of the deceased owner – a frequentoccurrence without a plan and effective buy-sell agreement. For simplicity,assume you are the surviving co-owner suddenly forced to deal with the spouse orchildren of your late partner, who now hold a 50% inherited equity interest.That family may not understand the business or its market, be qualified (or wantto) work in the business and may hold different values or beliefs than you. Ifco-ownership continues and you can’t find a way to work together effectively,your business will be in deep trouble – sooner rather than later.
Consider the Scenarios
Qualified business lawyers can draft agreements that make for orderly exitsof the owners, regardless of whether the business is a corporation, limitedliability company (LLC) or a partnership. Because there are many “moving parts”in a typical buy-sell agreement, it’s important to have a team of expertsinvolved, including an accountant, insurance expert and estate-planning attorneyas members.
If a buy-sell agreement is not yet in place, sit down with your businessattorney and discuss how to handle various exit scenarios:
- How could the business’ ownership be made secure if an owner suddenly passedaway?
- What if an owner announced plans to retire right away or in a few years?
- Is there a mechanism in place to purchase the shares of an owner who departsfor other reasons – voluntarily or involuntarily?
- How can these transactions be financed without endangering the cash flow ofthe business or its remaining owners?
If your business already has an agreement in place, take time to review itperiodically and consider the various scenarios and solutions. After all, thebusiness world continues to change, as do the goals of the owners and the valueof the company.