Unfortunately, death, divorce and disagreements happen in life. But when they happen in a business with multiple owners, the complexity can create unintended consequences for the remaining owners, families and employees. An important protection in these cases is a properly drafted and executed buy-sell agreement to assist owners, an estate and the company for an unexpected change. So, when does a business with multiple owners need a buy-sell agreement? The short answer: Always.

 

Why is a buy-sell agreement important?
A buy-sell, or buyout agreement, protects business owners when another shareholder, co-owner or other partner leaves the company. Sometimes, this happens very suddenly, tragically and unexpectedly. Without a buy-sell agreement, this leaves the remaining owners and their families with a very complex, uncertain and financially risky situation.

 

What are the common situations for a buy-sell agreement?
If a co-owner decides they will leave the business, wants to retire, wants to sell his or her shares to someone else, goes through a divorce, or dies, a buy-sell agreement acts to protect everyone’s interests, setting the price and terms for a buyout. Every day that value is added to a business without a plan for future transition, it increases an owner’s financial risk.

 

What is required to have a ‘respected’ buy-sell agreement?

Buy-sell agreements put in place or modified after October 9, 1990 must be binding during life and at death. The buy-sell must also meet these three other requirements for it to be respected for valuation purposes:

  1. It is a bona fide business arrangement
  2. It is not a device to transfer such property to member of the decedent’s family for less than full and adequate consideration in money or money’s worth, and
  3. Its terms are comparable to similar arrangements entered into by a persons in an arm’s length transaction.
Proper planning requires you to think carefully about outcomes

Care must be taken in crafting a buy-sell agreement to assist in the orderly transition without creating major headaches for either the estate, the family of the deceased, or the business entity involved in the transaction.

We cannot emphasize enough how important it is to involve professionals such as an attorney, accountant and financial advisor in the process of establishing an ironclad agreement that meets the needs of the business owner, as well as taking into account the effects on estate taxes resulting in the untimely death.

Once a buy-sell agreement is set up, it should be reviewed at least once a year to ensure no new significant business or personal changes need to be considered that require a revision of the agreement.

 

Build your advisory team today so you are ready if the unexpected happens

To properly transition your business, it takes a deep understanding of the legal and tax implications. In life, the unexpected can happen. Be ready so that your focus can be getting your family, your shareholders and your business back on track quickly. A good buy-sell agreement and ongoing guidance from your advisory team will help you avoid unnecessary litigation costs, estate tax liability, and minimize distractions. To speak with an experienced professional regarding your unique situation, contact either Sean Boland or Barry Divine.