The average business owner spends 10 hours per day, six days per week to get their business to the point where it can provide a measure of security for their family. When the business is owned by partners, all those hours of work can go to waste if they fail to establish a plan in the event one of them suffers an untimely disability or death. Only by planning ahead can the survivor be assured of a smooth transition.
A Buy-Sell Agreement is a written contract between the owners of a business which details what is to occur upon the happening of certain “triggering events” which “trigger” an owner’s obligation to sell their interest in the company. The most common triggering events are disability or death of one of the owners. Typically, the Buy-Sell Agreement provides that the surviving owner of the business will purchase the deceased or withdrawing owner's share of the operation. Other triggering events that should be included situations where one of the owners retires, divorces, files for bankruptcy, loses a professional license necessary for the continuation of the business, or wishes to sell their interest in the business.
The agreement should set forth the purchase price to be paid or should provide a formula for determining the price. The value of the business can be mutually agreed upon by the owners as long as it is a reasonable value. However, this value should be reevaluated on an annual or bi-annual basis. Alternatively, a certified business appraiser is an acceptable way to make a third-party objective determination of the value of business.
Perhaps most importantly, the agreement must have a mechanism for providing the funds needed to make the purchase. Life insurance is generally the vehicle used to fund a buy-sell agreement. However, the full value of the insurance policy would only be realized in the event of death. An insurance policy may provide for a cash surrender value, which could also be used for a triggering event other than death, but may not be sufficient to cover the entire purchase price. As a result, alternative methods to provide funds for the purchase of a withdrawing owner’s business interest should also be considered.
We will be further discussing buy-sell agreements and other important aspects of business planning on May 17, 2012, from 6:00pm to 8:00pm, during our complimentary workshop on Business Succession Planning. This workshop will be held in the Learning Center located at the Law Offices of Hoyt & Bryan, LLC at 254 Plaza Drive, Oviedo, Florida 32765. Please call (407) 977-8080 and reserve your seat today.
