how to protect your business with a buy/sell agreement

by FitSmallBusiness.com

Buy/sellAgreementsHow To Protect Your Business

the health of your business.

As a business owner, one of your primary concerns is

overseeing

to perform his or her duties

Butwhat would happen if

one of your partners was no longer able

effectively?

if you or one of the other co-owners has to

You will need to have a

plan in placewhich describes what would happen

leave the company.

What is aBuy/Sell

Agreement?(Also known as a buyout agreement)

What is aBuy/Sell

Agreement?(Also known as a buyout agreement)

Is a legally binding contract designed to deliver a detailed game plan for how the remaining co-owner(s) are to carry on in the event one of you leaves the business.

ThisDeparturecould be the result of a number of different factors

ThisDeparture

Including retirement, desire to sell shares, disability, divorce, individual debt default or bankruptcy, disagreements among the owners, or death.

could be the result of a number of different factors

Why You Need One

Some refer to the Buy/Sell as a

“business will.”

Some refer to the Buy/Sell as a

“business will.” It is designed to protect the company – to make sure important things are taken care of – if someone leaves.

advantages:• It maintains the continuity of your business by making sure members get to decide what happens to the business before trouble arises.

advantages:• It maintains the continuity of your business by making sure members get to decide what happens to the business before trouble arises.

• It protects company ownership by laying out a succession plan for departing members. This keeps remaining members from being saddled with untested successors.

advantages:• It minimizes disputes between remaining co-owners and the family of the departing owner by having a strategy in place ahead of time to govern business operations.

advantages:• It minimizes dispute between remaining co-owners and the family of the departing owner by having a strategy in place ahead of time to govern business operations.

• It alleviates co-owner stress and uncertainty by specifically identifying which events would trigger a buyout.

advantages:• It protects business assets and liquidity by providing a financial (and tax) plan for each of the different triggers addressed in the agreement.

advantages:• It protects business assets and liquidity by providing a financial (and tax) plan for each of the different triggers addressed in the agreement.

• It protects the interest of, not just the business entity itself, but also that of the business owners (and their families in the case of death/disability) to ensure are handled with respect, courtesy and the utmost fairness.

are typically structured in one of two ways:

Buy/Sell Agreements

cross-purchase Allows remaining owners to buy out the ownership interest of the departing co-owner.

cross-purchase Allows remaining owners to buy out the ownership interest of the departing co-owner. Redemption

Enables the business entity itself to reclaim the ownership interest of the

departing owner.

it will need to address four key business issues: No matter which type of agreement you choose,

• The Succession Plan• Triggering events • Funding Sources• Buyout Price

Succession Plan The first question your Buy/Sell Agreement should answer is this:

Succession Plan The first question your Buy/Sell Agreement should answer is this:

Who can buy the departing owner’s shares or interest in the company?

Succession Plan The loss of key personnel can be devastating for a business.

Succession Plan The loss of key personnel can be devastating for a business.

It affects how the business is managed and impacts company sales, creditworthiness, market share and its overall market value.

Triggering events

Triggering events guarantee owners that upon the occurrence of specific events their shares of stock will be bought out.

What will trigger a buyout?

Triggering eventsWhat will trigger a buyout?

Some of the most common reasons for buyout are:

Some of the most common

disability, divorce, debt and death.

reasons for buyout are:

disabilityAn owner who has become disabled and is no longer able to perform his or her duties may need to be bought out in order to protect the integrity and liquidity of the company.

The Buy/Sell Agreement should specifically define what constitutes a disability.

divorceAn owner who is in the midst of a divorce may be bought out to protect the company’s ownership. It’s not uncommon for a family law judge to order a business owner to split his or her interest in a company with the former spouse.

divorceA clause which ensures the former spouse will sell those shares back to one of the company’s original owners or to the company itself can protect your company from being torn apart.

DebtCredit isn’t easy to come by and a blow to your company’s credit rating can result in thousands of dollars in unnecessary fees being levied on your business.

DebtCredit isn’t easy to come by and a blow to your company’s credit rating can result in thousands of dollars in unnecessary fees being levied on your business.

Particularly for small businesses, individual owners are often on the hook as personal guarantors for any and all business debt.

DeathThe death benefit paid to the family of a deceased owner is going to be the largest buyout payment of any of the afore-mentioned triggering events.

DeathIt is often the case that key personnel / co-owners are covered by company-paid life insurance policies which are issued with a face value equivalent to the buyout price.

If a shareholder dies, the life insurance policy pays the company and the company buys shares back from the decedent’s family.

Where will the money come from to complete the buyout?

Funding sources

Where will the money come from to complete the buyout?

Are the individual owners responsible

Funding sources

for initiating the buyout?

Where will the money come from to complete the buyout?

Or will the company be used as the

Are the individual owners responsible

Funding sources

for initiating the buyout?

funding source to buy out a departing co-owner?

Funding sourcesBusinesses often have insurance policies in place to cover the expenses of funding a buyout when necessary.

What is the price of the buyout?buyout valuation

Buyout prices vary depending on the buyout trigger and market conditions.

What is the price of the buyout?buyout valuation

Buyout prices vary depending on the buyout trigger and market conditions.

Company appraisals can help ensure the company does not overpay for shares as well as ensure beneficiaries are not underpaid for their shares. Each trigger could have a fixed price

in business is always to prepare The rule

abundantly before.

in business is always to prepare The rule

abundantly before.You can’t predict the future and often, you can’t stop hard times from touching your business. You can do what’s necessary to minimize its impact, however.

And Finally...

the process of To learn how to

running your businessvisit us at....

simplify

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