As consultants, we have the opportunity to work with countless business owners who are extraordinarily successful in running growing, profitable businesses. However, it is many of these same business owners who often fall into a dangerous trap – they do not see the need to plan for the day when everything may not be so rosy. They may be in business with family members or with trusted partners and feel confident that everything will be taken care of and that no disagreements will arise in times of trouble. Why incur the expense and devote precious time to something that most likely, won’t be necessary? The trap is that without planning and a formal buy-sell agreement, even the most accomplished business owner can wind up unprotected and unprepared at a very vulnerable time.
Life events happen to everyone. Death, retirement, divorce, disability or a dispute with a business partner are either unavoidable or commonplace. And, they can bring about adverse consequences in any business. To complicate matters, these are the events in our lives that are filled with emotion and those involved are often not at their best. Emotions can get in the way of effectively and equitably resolving business issues and making good decisions. Why not implement a “plan” to deal with these issues well before they arise?
The plan is a well developed buy-sell agreement that provides peace of mind to the business owner, shareholders and the key management team. A buy-sell agreement provides these key parties the knowledge that a vehicle exists to ensure that when life events occur, the business will continue without emotional interruptions. The agreement functions as a “game plan” so that the owner, the shareholders and management team all understand exactly what will occur under different scenarios.
Why spend valuable resources to develop a buy-sell agreement? We think that there are four compelling reasons, just to start…
- The Owner. A buy-sell agreement integrates the needs and capabilities of the business with the owner’s personal, business and estate plans, especially with regard to liquidity needs and vision as to the future control and ownership of the businesses.
- The Shareholders. A buy-sell agreement establishes the value of a shareholder’s stock in conjunction with various trigger events such as, for gift, estate, and generation-skipping tax purposes. A buy-sell agreement can be structured to help minimize taxes and preserve the shareholder’s wealth.
- The Family. A buy-sell agreement addresses business succession issues and provides a roadmap for dealing with disputes that can easily evolve into lengthy litigation, drained financial resources and the breakup of the business and family.
- Key Management. A buy-sell agreement ensures business continuity amidst life’s storms. The agreement can eliminate uncertainty and emotional unrest for management and allow the team to carry on.
Now that you have a better understanding of why buy-sell agreements are critical to privately owned companies, we’ll be providing practical tips for what to consider and what to avoid in the next two posts in this three-post series, to follow in January 2014.
In the meantime, if you have questions about establishing a buy-sell agreement, contact Paula K. Barrett, CPA/ABV, CVA, partner and leader of RKL’s Business Consulting Services Group, at firstname.lastname@example.org or 610.376.1595.
Contributed by Paula K. Barrett, CPA/ABV, CVA, partner and leader of RKL’s Business Consulting Services Group. Paula specializes in business valuation and litigation support services, assisting clients in the acquisition or sale of closely-held businesses and general business planning services. She also has experience in tax-exempt bond financing services, including bond verifications and arbitrage rebate computations.