Tuesday, June 2, 2009

Business Succession Plan Buy-Sell Agreements - Addressing the Critical “What Ifs?”

Consider what planning should be done now for the eventual sale or transfer of your interest in your business (i.e. should you have a buy-sell agreement in place?). The time to prevent disputes is before they occur. My experience is that owners anxieties created in dealing with one another, are inversely proportional to the effort they spend addressing business problems in the event that they should happen. Dealing with these contingencies before they manifest themselves is the secret to a harmonious business relationship with other owners. Legal fees as well as sleepless nights will be minimized if you agree to the "What Ifs" now.


Use the checklist below to determine areas where you may need assistance. Answer Yes or No to each question. Establishing a business succession plan is as important as a business plan when you start a business. This is probably the most neglected aspect of running a business. If you are a business owner and do not have a succession plan in place, you need to address this issue. Take this checklist and your answers to a qualified business attorney to get your succession plan in place.

Applicability

  • Should the agreement apply only to the current owners or should it be binding on all owners throughout the life of the business entity?
  • Should the agreement provide language that it supersedes all other agreements to redeem a business interest?
  • Is the agreement being reviewed annually? Changes of price or terms should require a unanimous vote of the owners.

Type of Agreement

  • Should the agreement be structured as a redemption agreement (corporate buy-back) or as a cross-purchase agreement (shareholder purchase)?
  • Should the agreement be structured:

-To require the seller to sell and the buyer to buy?

-To give the buyer an option to require the seller to sell?

-To give the seller an option to require the buyer to buy?

-To give a right of first refusal to the buyer?

-As a combination of any of the above?

  • Should the death of an owner cause an automatic buyout of the owner’s interest or should his/her family be allowed to remain as an owner?

Buyout Price and Time for Payout

  • Should the buyout price from the estate or heirs of a deceased owner be addressed? If yes, when should it be paid? What interest rate should the obligation bear?
  • Should the buyout price to a disabled owner be addressed?
  • Should the buyout price to an owner who resigns or is dismissed be addressed?
  • Should there be a difference in price if there is an amiable parting of ways?
  • Should the buyout price to an owner who goes bankrupt be addressed?
  • Should the price reflect the fact that you are selling to a long time business associate rather than an outsider?

Funding

  • Should the agreement provide that the buyout be funded by life insurance or some other investment vehicle?
  • If funded with life insurance: Should the type of life insurance used be addressed (i.e. term life, ordinary life, last to die, paid-up life, universal life or an endowment policy?)
  • Should a life insurance trust be used?
  • Should all of the policy proceeds be required for redeeming the interest?
  • Can part of the proceeds be used to help the entity recover from the loss of the owner?
  • Should whole life insurance policies with cash values be transferred to the owner at termination or retirement?

Security

  • Should the agreement be guaranteed or secured?
  • If so, should the security be in the form of:

-A pledge of business assets?

-A personal guarantee by the other owners?

-An agreement obligating the entity to refrain from increasing salaries, paying dividends or making loans until all outstanding liabilities to the beneficiaries are paid?

Loans

  • Should the disposition of owners' loans, whether receivables or payables, in the event of termination because of death or disability be addressed?
  • Should the disposition of owners' loans in the event of termination other than because of death or disability be addressed?

Other

  • Should there be a covenant not to compete? If so, should there be geographic and time limitations?
  • Should there be a period of disability before the other owners of the business have the right to buy out a disabled owner?
  • Should an owner have the right to transfer or assign to a trust, for estate-tax planning purposes, their rights and interests in the business?
  • Should the spouses of the owners sign the buy/sell agreement?
  • Do other family members presently own any stock?

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