Monday, January 30, 2006

The Simple Buy-Sell Agreement is a Must - In Layman's Terms

Category: Business Law and Planning

If you have a business and have a partner (or many people with equitable interests) a simple, straight-forward agreement can allow you to retire, keep the business in the family, cash out your family if you die or become disabled, and avoid many an estate administration difficulties (or disasters). The agreement? The oft overcomplicated and mis-understood Buy-Sell.

Now, there are many situations where a Buy-Sell agreement needs to be highly customized and deal with unique fact patterns. But a good, solid, Buy-Sell Agreement really only needs to address what happens in one or more of the following situations:

  • An owner wants to walk away/retire
  • An owner is forced out for bad behavior (think of the Enron trial starting this week)
  • An owner dies
  • An owner becomes disabled

Some other considerations:

  • Do you want to be partners with your partner's spouse? If not, you need to have a binding agreement that if your partner dies, their estate will sell, and you and the company will buy. Otherwise, welcome your new unintended partner (who likely knows nothing of your business, and will want to sell it at bargain basement prices to get cash) with open arms.
  • Can you agree on a way to value your business? If not, can you agree on allowing a third party to value your business? If you can do either of these, you have overcome what is generally the greatest obstacle to preparing a Buy-Sell agreement.
  • What can you afford to pay out of earnings to buy out your partner's interest? The answer to this question will create the loan repayment schedule. Another alternative is to fund the obligation with insurance.
  • Should a partner be penalized for being "fired" or leaving within a certain time frame? If so, discount the value being paid in the event that a partner engages in "bad acts".

While these are certainly large questions, as long the partners are getting along reasonably well at the time that you asked them, you will likely find that it's easy reach a reasonable consensus. The ability to come to a consensus, and reduced it to writing while everyone is getting along (and is healthy and breathing) is the key to creating a simple Buy-Sell agreement that will allow your business and your family to succeed.

For another perspective - in layman's terms, look at this Kansas City Star article: Buy/sell agreement makes succession a success:

"One of the most important aspects of a buy/sell agreement is that it guarantees the purchase of the business interest for a fair price."

"As important as it is for business owners to tend to their day-to-day operations in order to have a successful enterprise, it’s equally important to institute quality succession planning. That often means having a team of specialists in the areas of tax law, accounting/valuation and insurance. If your business and family are a top priority, you really do not have an option."

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