Are you an owner in a multi-owner Corporation, LLC, S-Corp, or Partnership? If so, have you given any thought to or prepared a formal business succession plan?
One of the more difficult parts of being a business owner can be deciding how to wind up a business or determine how to restructure ownership after an owner wants out or dies. In order to simplify this process, the business owners should insist on having a formal Buy/Sell Agreement signed when they begin their business relationship.
A Buy/Sell Agreement is a legally binding contract that stipulates how an owner’s share of a business may be reassigned if that owner dies or otherwise leaves the business. Buy/Sell Agreements often stipulate that the available share be sold to the remaining owners or to the company. Buy/Sell Agreements can take many forms and there are no requirements as to how such agreements must be structured. Terms for such an agreement are negotiated between the owners. Therefore, the advice of an attorney is needed to ensure the best possible exit strategy for all of the owners.
Important clauses that every Buy/Sell Agreement should contain:
1. Valuation. The Agreement should include detailed information about your business’ worth. You should consider having it professionally appraised or using a set formula to value the business. You want the valuation provision clearly defined to establish a fair purchase price in the future in order to reduce conflicts.
2. Identify the Parties. The Buy/Sell Agreement must identify all the owners entering into the agreement.
3. Funding the Buyout. You want to make sure the Buyer has the financial ability to fulfill the payment terms of the Agreement. Many Buy/Sell Agreements utilize life insurance policies to ensure the purchase will be adequately funded. Don’t just assume the Buyer will have the cash at the time to purchase the business or that they can borrow 100% of the purchase price.
4. Identify Triggering Events. Owners must agree on the events that will trigger a buyout. These triggers can be life events that interfere with the ownership, such as death, divorce, illness, retirement, breach of contract or failure to fulfill obligations. The goal is to protect your interests should a buyout be necessary.
5. Tax Considerations. Proceeds received from the sale of an ownership in a business are typically taxable. Work with your CPA to minimize any potential tax liability. Failure to do so could result in a higher tax than expected.
6. Limitations. Owners will need to decide who can and cannot retain an interest in the business in the future. You may wish to limit future ownership to lineal descendants of the original owners to avoid working with outside partners who have no connection with the remaining owners. You also may wish to limit who has decision making/voting rights, should the ownership interest pass from the original owners. All business owners should coordinate their estate plans with the Buy/Sell Agreement to help avoid future conflict.
Each state has unique laws regarding transfer of business ownership interests. Be sure to consult an attorney licensed to practice law in the state where your business is formed. If you need assistance with Kansas or Oklahoma business matters or Buy/Sell Agreements specifically, contact Davis & McCann, P. A., Dodge City, KS. We are members of Wealth Counsel, a national consortium of Estate Planning Attorneys and the National Academy of Elder Law Attorneys (NAELA). We focus our practice on providing clients with the best legal advice on estate planning, Medicaid and Long-term Care Planning, Family Business/Small Business Succession Planning, Probate, Trust Administration, Real Estate Transactions, and related matters.
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