It is never too early to start succession planning for your business. If you currently have partners or are considering adding additional individuals to your ownership structure, then you should be considering a buy-sell agreement.
This document helps accomplish several objectives. One of these is to ensure orderly business succession should an owner decide to transfer his interest due to a voluntary (i.e. retirement) or involuntary event. (i.e. bankruptcy or death). Any of these types of events are considered by the buy-sell agreement as a triggering event.
This document gives the co-owners or business entity the ability to purchase the interest from the owner in order to restrict outsiders from becoming owners. Essentially, this agreement helps avoid internal conflict and ensures an easy transition.
For example, it is common for two family members who work really well together to decide to enter into a working relationship as they open a new store. Everything seems to be working great between the partners until an unfortunate tragedy strikes and one of the owners is unable to work due to an illness.
Now the business and partner are not sure what to do with the sick partner’s interest. The lack of a buy-sell agreement could potentially destroy the hard work that the partners have put into their business. By planning ahead, the uncertainty may have been removed and they could have focused on creating a better future for the company.
The company documentation would specify who is allowed to buy into the business when an unfortunate event occurs. This helps protect the security of their employees and the continuity of the business.
One key area of a buy-sell agreement is the business valuation clause. This explains how the value of the business should be calculated. There are various ways this could be calculated from a specific formula that sets the value of the business at a certain time.
Some companies that have investors often have the value determined regularly by experts as it offers reassurance to everyone involved that the business is going down the right track. Determining what valuation strategy to use is important. It is recommended to work with an attorney or tax advisor to help guide this decision.
Besides a business valuation, the agreement should spell out additional important rules. What is included in your agreement will depend on your specific situation. Your business attorney will be able to assist with drafting the document and be able to answer your questions.
Prior to meeting with your attorney, consider what type of events will trigger the sale of your company, how you would like the sale to be funded, as well as who may buy into the business. As you are setting rules in your agreement, remember that these are not permanent. Agreements can always be changed in the future.
It is recommended to start your buy-sell agreement when your business is in a good place. As it is always easier to create a plan when everyone is in the right mindset and is happy. Remember, it can be difficult to craft an agreement when there is an emergency or when a problem occurs.
If you don’t have have a business attorney you know and trust, reach out to me at 310-534-55577 or [email protected] for a referral. I love to share resources with those who need them!
