Business Succession Plans / Buy-Sell Agreements
While most individuals are aware of the need to have an estate plan for their personal assets, business owners may not fully realize the need to have an estate plan for their businesses as well. Without a plan and the necessary agreements place, a business’s continuity following a “triggering event” (such as a business founder’s passing, divorce, bankruptcy, disability, failure to maintain professional licenses or adhere to fiduciary duties to the business, or withdrawal from the going concern) is at risk. Absent such agreements, ownership in the business could easily end up in the hands of someone who is uninterested, unqualified, or simply unavailable to continue the businesses’ operations. There may be disputes as to who ends up owning the business and oftentimes disputes regarding how much the business is worth. A properly drafted “buy-sell agreement” can define those triggering events, provide for funding mechanisms for the buy-out of the former’s partner’s interest, set a valuation methodology in place, and define the payment terms so that there is a clear, understood procedure for transferring the equity interest in your business. Dispute resolution mechanisms in these agreements can help avoid costly and protracted litigation, thus conserving your and the business’s financial resources. Richard H. Poulson an Alameda County business attorney serving clients throughout the Bay Area, can help you plan for these contingencies to ensure that your goals are met.
For example, businesses commonly maintain insurance (referred to as “key man” insurance) to cover their essential employees or owners. Life insurance can also serve as a funding mechanism for a business when it became necessary to purchase a deceased partner’s equity from his or her estate. Whether used by the business itself to redeem the stock or by the remaining owners to fund a cross-purchase, life insurance can ensure that the funds are available to purchase the deceased owner’s equity quickly. Other payment mechanisms include promissory notes or a business’s “sinking fund” whereby the business maintains a capital reserve set aside to cover these expenses while simultaneously maintaining adequate capitalization. Without these payment terms agreed to beforehand, the payout amount may be agreed to but the terms of the payout and funding for it may render the number itself meaningless.
A buy-sell agreement itself can take a variety of forms as noted above. From an “entity purchase” buy-sell where the business buys back the equity interest; to a “cross purchase” buy sell, where the other owners have an opportunity to purchase the departing member’s interest; to a “one way” buy-sell where one looking to sell the equity in a business contracts for another to purchase it under pre-defined terms, these agreements satisfy a number of needs. Regardless of their ultimate form, “buy sell” agreements are akin to pre-nuptial agreements as they both seek to address the division of assets upon the occurrence of certain triggering events under pre-defined terms.
There are also occasions where a departing member of a business may want or need to be retained as a consultant over a specific period of time to ensure the transfer of knowledge, maintain client relations, and for the training of employees to fulfill the departing owner’s responsibilities. These consulting contracts may be based on a flat fee, based on the conversion rate for clients remaining with the business, or be based on the business’s profitability post-withdrawal. Identifying the need and options to ensure this transfer of intellectual capital and client base are essential to a business survival through such changes.
The Law Office of Richard H. Poulson, an Alameda County business lawyer, can help you determine what you want to happen with your business in the future and identify the steps that need to be taken to ensure that your goals are met. Working with your estate attorney and tax advisor, Richard can help structure a business succession plan so that the time, effort, and money you have invested in your business will be rewarded and not spent on disputes that can result in the absence of such a plan.