Regardless of the business cycle stage your company finds itself, it is likely that on a day-to-day basis as a business owner your mind is focused either on ensuring customer satisfaction or taking care of your employees in some way. It’s possible, a financial advisor or your attorney mentioned a buy-sell agreement at some point. But if the topic even momentarily grabbed your attention, it is unlikely it made any lasting impression on you and even more doubtful that it spurred you into action. Unfortunately, this is all too commonplace because of the investment of time and money most business owners assume is involved- to say nothing of the general avoidance associated with subjects a buy-sell addresses, like death and disability. Let’s dive deeper into what a buy-sell agreement does and why you should have one.
As I mentioned, most business owners are worried about the day-to-day operations of their company and not planning for the inevitable- that they will one day leave the business. Whether you exit in 3 years or 3 decades, leave voluntarily or not, your exit will have a lasting impact on your customers, your employees, your business partners and your family. A well-crafted buy-sell agreement allows you to influence the impact your exit will have on each of these groups and minimize the uncertainty and disorder that often accompanies an owner leaving a business. To detail just a few key offerings, upon a triggering event (e.g. retirement, death or disability) an agreement can provide:
- Structure for how and to whom ownership should be transferred.
- With a buy-sell agreement, there is no need to go looking for a qualified buyer. The market and timing for the shares to be sold is already in place.
- A set market value for the business or at least offer a method for valuing the business.
- There are several valuation methods that can be used in the agreement and the appropriate one should be chosen based on what makes the most sense for your business.
- Valuable operating liquidity to the business at a time of need.
- A separated owner, who may have been key to new sales or an important part of operations, may need to be replaced by an external candidate. Employee searches can take time and money and having liquidity on hand offers the business some valuable breathing room.
- It works in concert with your estate planning documents to minimize tax and maximize efficiency.
- A business can often represent a highly illiquid, majority share of an owner’s net worth. Integrating a buy-sell agreement into the owners’ estate planning process helps to minimize the future estate tax burden, while simultaneously establishing a funding mechanism for any transfer taxes.
Even the most vigilant business owner can’t eliminate every risk to his company or anticipate every eventuality on his own. The above represent just a few of the many reasons why an owner with a buy-sell agreement can feel confident knowing they have a plan in place for the various situations the future may bring. Hopefully, this offers the necessary push for many of you to take action to protect yourselves, your families, and your businesses. In a future posting, we will look at the features and benefits of the different types of buy-sell agreements in more detail.