Dust Off and Review Your Buy-Sell Agreement
If you co-own your business, the business continuity agreement or “buy-sell” is one of the most important documents you will sign. If you have a buy-sell that is out-of-date, un-reviewed, or focuses on the wrong issues, it may be worse than having no agreement at all.
Lifetime or Death Events
Business continuity or buy-sell agreements control the transfer of ownership in a business when certain lifetime or death events occur. Typically the “trigger” events include the death of an owner, and a sale and transfer of stock from one owner to another or to an outside party. Your buy-sell can also describe your agreement about how transfers will take place during the owners’ lifetimes such as an owner’s permanent and total disability, termination of employment, retirement, bankruptcy, divorce, and/or a business dispute among the owners.
At each of these events, the business continuity agreement may require the business or the remaining owners to purchase the departing owner’s stock; or it may give an option to the business or the remaining owners to buy that ownership interest. As a third option, it may give the departing owner the option to require the company to buy his or her ownership interest.
Remove the Guesswork
The agreement should provide a clear picture to a departing shareholder of how much money he or she will receive and how often. Likewise, the remaining shareholders know in advance the extent and duration of their buyout obligations.
We urge you to review your buy-sell agreement at least annually as part of your annual planning meeting with your advisors. At a minimum, ask:
- Does it reflect when you want to depart your company?
- Does it give you the amount of cash you need to be financially secure?
- Is it designed to minimize income taxes to the seller and the buyer in the event of any type of lifetime ownership transfer?
If your buy-sell agreement is well drafted and conscientiously updated for changes in ownership, value and other circumstances, there just aren’t many disadvantages. Contact an Anders advisor if you have any questions about buy-sell agreements.