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The AR Group

Business Succession Planning – Buy-Sell Agreements

By Vanessa Barnett

Starting a business is a formidable adventure.? Going through the formation process, choosing the type of entity structure, electing a tax status, gaining licenses and permits, and bringing on employees or contractors, are just some of the difficult topics faced by business owners. After the business is up and running, owners tend to focus on the day to day operations of their company.? An integral part of the successful duration of any business however, is to plan for its transition to a new owner or owners.

Carefully prepared buy-sell agreements are often part of the larger topic of business succession planning and are very important when an owner dies or wants to retire.? Buy-sell agreements however, need to be incorporated into the business plan from the start.? Consider, for example an LLC of three equal members.? Two years into this successful LLC?s existence, one of the members goes through a divorce and the ex-spouse gets a portion of the member?s ownership in the divorce decree ? what happens to the membership interest at that point?? Should the existing members be required to deal with the ex-spouse?? Can the ex-spouse simply sell her interest to an unknown third party?? This is just one scenario that is answered through a properly drafted buy-sell agreement.

The buy-sell agreement can be a separate document or incorporated into the shareholder agreement or an operating agreement of an organization.? While these agreements must be carefully drafted to fit the specific needs of each organization, all buy-sell agreements should generally contain clauses which address: 1) what determines when a buyout should take place, for example death or retirement of an owner; 2) who can and who cannot purchase a departing shareholder?s or partner?s portion of a business; 3) how to determine the price of a partner?s or shareholder?s stake in the business and 4) the terms of payment.? A properly drafted buy-sell agreement will ensure that your business has longevity as well as the proper owners at its helm.

Often important to larger companies is making sure the buy-sell agreement is adequately funded in the event the company needs to purchase a departing owner?s business interests.? While there are several ways to fund a buy-sell agreement, most often this is done with a life insurance policy, either under a cross-purchase plan or through a corporate entity redemption plan.

SMART TIP: At The AR Group we have the experience necessary to help you prepare a buy-sell agreement best suited to the needs of your company. While a buy-sell agreement is an integral part of the proper function of a business, it is also part of the larger field of business succession and estate planning.? Please call the professionals at The AR Group to get help with all of your business as well as estate planning needs.