Buy-Sell Agreements: Are You Prepared?
Jan 20, 2015
Business scenario: Fifteen years ago, I and three others started a business. We had our corporate attorney draft a buy-sell agreement which we all signed.Fast forward to current day. A triggering event occurs (a member quits, is voted out due to lack of performance, retires, becomes disabled, is going through bankruptcy, is having a divorce, etc.), what happens? Our buy-sell agreement was never updated, so what happens is dependent upon what the agreement stated 15 years ago.
In this specific case, there are a number of variables that can drastically affect the outcome of the situation at hand. If there is a shareholder dispute, the process will be fairly lengthy as a result of involving multiple attorneys and the appeals process. Who owns the stock during this timeframe? Does the former shareholder, who feels was voted out of the business unfairly, still get distributions during the lengthy appeals process?
Or, what if a member is going through a divorce, the ex-spouse wants part of the other spouse’s percentage of ownership in the business. Does the buy-sell agreement limit this from happening?
If life insurance policies are in place on each of the owners in case a triggering event occurs. Will the proceeds from the policies be enough to purchase the interest of the departing owner? Does the policy amount cover the total value of the departing member’s interest? If not, what other funding vehicle is going to be to purchase the interest? Also, is the value received by the departing member or member’s spouse “in the ballpark” of what was expected; or is there going to be some ill feelings when it is all said and done between friends (now former friends), family, etc.?
So, let me ask you this, do you have a buy-sell agreement in place? When was it last updated? Does the buy-sell agreement address any of the items mentioned in above? Are the intentions of the ownership group the same as they were when the last buy-sell agreement was signed? Does the buy-sell agreement actually meet the expectations of those signing it?
These are critical questions that must be considered when involved in a buy-sell agreement. Whatever you spend on a buy-sell, it will be a drop in the bucket compared to what it can save you.
A buy-sell agreement provides the peace of mind knowing that their business is in capable hands should they no longer be able or want to manage it. It also:
- Provides money to create a fair market value exchange
- Promotes equitable and orderly transfer of wealth, ownership and management
- May offer tax advantages
- Guarantees heirs a buyer for assets they may not know how to manage
- Provides heirs cash to pay estate debt, expenses and taxes
It is far much easier to take the time now to ensure all your “ducks are in a row” while the interests of the parties involved are in alignment. Once a triggering event does occur, the interest of the parties involved generally diverge, and either the buyer or the seller will ultimately be unhappy and unsatisfied. Which end of the spectrum will you be on? Contact our buy-sell agreement specialist, Ryan Leininger at firstname.lastname@example.org or call (419) 891-1040.
By: Ryan Leininger, CPA, CVA