A big concern of many business owners is what would happen to the business entity if one of the owners becomes disabled, dies, desires to sell to a third party non-owner, retires, becomes divorced or bankrupt, or changes employment. Proper planning can alleviate some of the stress and uncertainty that comes along when business ownership and personal life meet. A properly drawn Buy/Sell Agreement will accomplish two important goals 1) ensure the continuity of ownership and management of the business entity without having the departing owner's successor thrust upon the remaining owners, and 2) provide a retiring, disabled or deceased owner and family fair compensation for such owner's share of the business entity, all without compromising the liquidity needs of the business entity. A Buy/Sell Agreement will also establish the value of the business interest of a deceased owner for estate tax purposes.
Different situations can cause a mandatory or optional buyout of an owner’s interest by the business entity or other owners under the terms of a Buy/Sell Agreement. They include:
The valuation of the interest being purchased under the terms of a Buy/Sell Agreement is a critical issue for both the selling owner and the purchasing business entity or other owners. The valuation method must balance the competing interests of the selling owner, who desires a high valuation, and the purchasing business entity or other owners, who desire a low valuation. A Buy/Sell Agreement that provides for an agreed upon valuation method will eliminate conflict, disagreement and possible litigation between the parties when a triggering event occurs. Some common valuation methods are:
The funding of a Buy/Sell Agreement is also a critical issue for both parties participating in the buying and selling of a business entity. The selling owner wants to insure there will be funds to finance the buyout while the purchasing business entity, and remaining owners want the ability to consummate the buyout without compromising the liquidity of the of the business entity or themselves. Common funding tools are:
A Buy-Sell Agreement can be utilized to lower estate taxes, especially in family businesses with heirs who are active in the business. A reasonable but conservative valuation method will establish the value of the business interest of the deceased business owner for estate tax purposes. A properly designed business structure may result in a valuation favorable to the family and may greatly minimize estate taxes. The business may then be passed on to the heirs without excessive estate taxes resulting from a high valuation. However, any value selected is subject to IRS scrutiny and possibly challenge, and therefore the correct business structure and valuation method should be reasonable and have a rational underlying basis.
If you are a business owner, a Buy-Sell Agreement is a necessary component to cementing your business’ future and ensuring that it can continue successfully, despite the many changes that happen in life. JEFFREY BURR is a great resource for Las Vegas Buy-Sell Agreements; contact us today.