| Finance By
Paul Batt "The problem is, the buy-sell was drafted over 10
years ago, and it hasn't been updated since then. In order to give you your fair
share of what this company is worth I would have to sell the business, and then
I would loose everything I worked so hard for." "I'm not trying to be
difficult," the widow replied, "But I have a mortgage and three kids.
I think I'm going to have to talk to an attorney". Unfortunately, it's
not an uncommon story.
The Need for a Buy-Sell Agreement According
to a survey of beneficiaries of business owners, only 21 percent of business owners
had a formal plan to transfer their share of the business at their death or disability.
Of the business owners that did have a plan in place, many have not updated their
plan in years.
With no plan in place for contingencies such as death and
disability it creates a number of problems. Without a formal, updated buy-sell
agreement:
Surviving partners, shareholders, or family members may
be forced to sell or dissolve the business
The remaining business
owners may have to decide how they will compensate the decedent's family for his
or her ownership interest
The decedent's estate cannot be guaranteed
it will receive a fair price for the business interest
As a business owner
you are typically focused on the day-to-day operations of your company - not the
consequences of a premature death or disability. But the short and long-term consequences
of losing an owner should not, and cannot, be overlooked. What
is a Buy-Sell Agreement? A buy-sell agreement is a legally binding contract
that requires the sale and purchase of ownership interests in the event of the
death, disability, or retirement of a partner or shareholder. It is a separate
legal document that ensures that any ownership transition will occur as planned.
Usually these agreements are among co-owners, or between owners and the
company itself. It is also possible that individuals who are not currently owners
(such as a key employee or family members) may be a party to the agreement. Outlining
a Buy-Sell Agreement There are two key elements in developing a buy-sell
agreement. The first is ensuring that the company is valued properly and the second
is deciding how the transaction is to be funded. Business
Valuation Valuation not only assures that the business is transferred at
a fair price but also helps in establishing a value for estate tax purposes. Updating
the value of your company on a regular basis is also very important. This can
be done by a simple agreement among shareholders at your annual meeting, or there
may be a formula in place that determines the new value each year. The
Funding of a Buy-Sell Agreement The second key element of a properly structured
buy-sell plan is the funding mechanism.
A buy-sell that is funded provides
that the funds will be available when they are needed to pay for the decedent's
business interest. There are a variety of ways that a buy-sell plan can be funded,
including installment payments, a sinking fund, a loan, and life and disability
insurance. Each technique has its advantages and disadvantages. An unfunded buy-sell
plan could create complications and delays, adding to the uncertainty that already
surrounds the death or disability of a business owner. Types
of Buy-Sell Agreements There are many types of buy-sell agreements including
the entity purchase plan, cross-purchase, trusteed cross-purchase, wait and see
approach, and if you have no partners and are the only shareholder, the key-person
or one-way buy-sell plan. You should discuss with an attorney which type of buy-sell
agreement would be appropriate for your particular situation.
Whether you
are a small two or three person operation, or a shareholder or partner in a large
corporation, having a properly structured buy-sell agreement is critical for the
survival of your company. The loss of an owner can create a void in both management
and operation and hence creates a significant challenge to business continuation
A properly designed & funded buy-sell agreement can help solve this problem
and can help ensure that the business and the careers that depend on it will continue.
Paul Batt is director of financial and retirement services at Phoenix-based Minard-Ames
Insurance Group. He can be reached at 602-273-1625 | 
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