Having business owners buy-sell agreement is critical for estate planning. When creating an estate plan, it is critical to review all areas of your personal and business life. If you are a co-owner of a business having a buy-sell agreement is important. Change is inevitable and protecting your estate is a top priority. A buy-sell agreement is a legally binding instrument that companies use to determine how ownership will change hands. It also establishes a reasonable valuation for the business and clearly specifies what happens when a trigger event occurs.
- Provide a market for the business interests in the event an owner dies or leaves the company.
- Provide the guideline for the transfer of an owner’s shares to a third-party usually subject to a right of first refusal of the other owners.
- Establish the price and terms, so the transactions under the buy-sell agreement occur in an orderly fashion.
- Ensures that financing, life insurance or cash is available to acquire shares when trigger events occur.
Trigger events include the owner quits, retires, dies, divorces or becomes disabled. Other triggers are bankruptcy, disqualification, dilution of ownership, non-compete provision and many more. It is critical to work with a qualified professional to think about potential trigger events and their implications.
Types of Buy-Sell Agreements
The four primary types of buy-sell agreements are:
- Those with fixed prices; Set by consent of the owners and determined by unanimous agreement.
- Those with formulas; A predetermined formula establishes the price.
- Shotgun agreements; The initiating party sets the price, the other party buys or sells at that price.
- Valuation process; Price of future transactions determined by a valuation process.
Having a buy-sell agreement requires recurring appraisals which are a legitimate business expense. The appraisals establish a basis for ongoing personal and corporate planning. There is no doubt about what the buy-sell agreement price is at any point in time. There is no question regarding the business value used for financial statement purposes. There is great value in this ongoing knowledge about the worth of a successful business.
The business environment is always changing; the needs of the business owners evolve and change over time. Also, the condition and needs of companies change as well. Be prepared for change with a great estate plan. Contact us to see how Ford + Bergner LLP can benefit you and your business.