A buy/sell agreement is a critical component of succession planning for many businesses. It sets the terms and conditions under which an owner’s business interest can be sold to another owner (or owners) should an unexpected tragedy or turn of events occurs. It also establishes the method for determining the price of the interest.
This may sound cut and dried. And a properly conceived, well-written buy/sell agreement should be — it is, after all, a legal document. But there’s a human side to these arrangements as well. And it’s one that you shouldn’t underestimate.
Turmoil and conflicts
A business owner’s unexpected death or disability can lead to turmoil and potential conflicts between the surviving owners and the deceased or disabled owner’s family members. Such disorder has the potential of disrupting normal business operations and can result in instability for employees, customers, creditors, investors and other stakeholders.
A buy/sell agreement ensures that an owner’s heirs are fairly compensated for the deceased owner’s business ownership interest based on a predetermined method. The other owners, meanwhile, don’t have to worry about the deceased’s spouse (or other family members) becoming unwilling (and unknowledgeable) co-owners. And employees will benefit from less workplace stress and disruption than would otherwise be caused if an owner dies or becomes disabled.
Indeed, among the worst potential succession-planning scenarios is when a deceased or disabled owner’s spouse becomes an unwilling participant in the business. Without a properly structured buy/sell agreement in place, the spouse could be thrown into this situation — even if he or she knows little about the business and doesn’t want to actively participate in running it. Further, without a properly funded buy/sell agreement, the surviving spouse could potentially be left with an illiquid asset at the very time he or she needs liquidity.
There’s also the less tragic, though still difficult, possibility of divorce. When a business owner and his or her spouse decide to end their marriage, the ramifications on the business can be enormous. A buy/sell helps clarify everyone’s rights and holdings.
Ownership successions are rarely easy — even under the best of circumstances. These transitions can go much more peacefully with a sound buy/sell agreement in place. Please contact us for help with the tax and financial aspects of drawing one up.