From the Desk of San Diego Estate and Business Planning Attorney, Kristina Hess
Business owners often are so busy building their business, they don’t think about what happens to the business if something happens to them (death, disability, retirement…)
A business succession plan may include a Buy-Sell Agreement when the company has multiple owners, or a business owner has associates who may one day want to purchase the business.
Here are some things to consider when planning what you want to happen to your business when you are ready to retire or in the event of your death or disability…
1. Define Triggering Events —
When does the Buy-Sell Agreement come into play? Death? Disability? Retirement? An Outside Bona-fide Offer? At the end of 5 years or some time frame?
2. How is the price to be determined?
Will you require outside appraisers or business valuation experts to evaluate the business?
Will the price be determined by a pre-set price?
Net book value?
Price determined by a specific formula?
Do you want the purchase price recalculated on an annual basis?
3. Preventing Outsiders From Purchasing Business?
One of the primary objectives of a Buy-Sell Agreement may be to prevent outsiders from purchasing the business. Minority members or shareholders may want
to be protected from an outside buyer. Alternatively, parties may want a right of first refusal.
4. What Happens If One Of The Owners Dies?
Often times, business partners or members may not want to be in business with your spouse or children or other beneficiaries of your estate plan.
If an owner or manager dies, does this trigger an automatic event? For example, redemption of the shares? Should the Trustee of the decedent’s trust have an option to sell the business interest?
5. Coordination with Employment Agreements?
Do employees subject to the Buy-Sell Agreement have employment agreements? What happens if the company terminates an employee who also owns shares of a company? Will the company have an option to purchase the shares back? Does the employee have an option to sell the shares back? What if the termination is involuntary? Should this require an automatic redemption of the shares?
6. Funding the purchase
Will the company purchase life insurance to fund the purchase?
Are the owners willing to allow the purchasing member to buy the company over time with the profits from the business? How much interest will be charged for a loan?
Some business owners will sell to an employee or outsider with an installment note paid over a period of years.
These are just some of the things to think about when planning for the succession of your business.
Like all planning, a failure to plan could be a plan to fail.
Be sure to include a business succession plan as part of your company’s overall legal landscape.
Create Your Legacy Today and get your business legal house in order.
San Diego Estate and Business Planning Attorney, Kristina R. Hess, KR HESS LAW, PC www.krhess.com
DISCLAIMER — this blog article is not intended to provide legal advice. We are not your lawyer unless you have a signed, written engagement letter with KR Hess Law.