Begin With the End in Mind

Business owners spend considerable time, effort, and resources in the building of their business. At some point they hope their investment pays off when they leave the business but if they are faced with a forced liquidation, the business could be sold for a fraction of its actual value.

A Buy/Sell agreement is a contract between a business owner and someone who has committed to buying their interest in the business. Like any agreement, it should be drafted by a qualified attorney. The document should spell out under what conditions the business interest will be sold and at what price. For example, if a business is owned equally by two founders, they may agree to sell their interest in the business to the survivor if one of them dies. This protects the business from a new owner (the deceased's family) and provides a fair price for everyone. Having a business succession plan in place also provides peace of mind for the businesses employees and customers who know that their jobs or supply chain is not in jeopardy.

Here are a few common mistakes business owners make with their business succession plans:

• Failure to realize that the agreement is an obligation. Buy/Sell agreements need to be funded (often with insurance) so the money will be available if (and when) the obligation is triggered.
• Failure to consider all possibilities. Most of the time businesses address the issue of the death of the (an) owner(s). But the younger the person, the more likely they are to become disabled rather than die. The best succession plans provide provisions (and funding) for a buy out in the event of a long term disability.
• Improper Valuation. The agreement can specify any amount it wants for the value of the business. Sometimes, a static value is used. If so, then the agreement needs to be periodically updated to reflect changes in the businesses actual value. An accurate valuation is important not only because it determines both the obligations of the successor(s) and the value to the deceased's family, but it also is used by the IRS in determining the value of the estate for tax purposes. Overstate the value and there their can be tremendous estate tax. Understate the value and your family is short changed. Fortunately a good CPA can help determine a formula to fairly value the business whenever the need would arise.

The End of the Line by BlakJakDavy

Comments

[Rush Nigut]

Art,

Thanks for the link and the compliment. You raise some terrific points. As my fellow corporate lawyer Imke Ratschko says, "Buy-Sell Agreements are like prenuptial agreements for people in business... As with prenuptial agreements, people tend to overlook their importance or simply don't want to deal with the subject; after all, they are in love!"

Great post. Keep up the tremendous work with your blog.

Rush