Buy Sell Agreements

For those of you who are business owners, with partners, you should pay close attention. Whenever I mention a "Buy-Sell Agreement" many business owners think I am talking about a contract to buy and sell a business. That's partially correct but it gets better. A properly structured buy sell agreement gives you the money to buy and sell that business, or a portion of it.  Here is a typical candidate:

John is a 41 year old 50/50 partner in a specialty paint and body shop with Harry who is age 60. Both are in excellent health. John is the business minded and organizing force of the business that makes sure the business runs right, aside from being very skilled in auto repairs. John is married has two kids and his wife knows very little about the business. Harry is legend in the business, has helped the company earn a solid reputation for excellent work and his extensive contacts has landed very valuable long term contracts. He's a real workaholic but, he hates numbers, can't manage a check book and spends almost everything he earns. His wife of 36 years has medical problems and his only son, a bright engineer not only hates the business, but seems to have a drinking problem.

John loves his partner because they make a great team. But he knows that in the next 10 to 15 years Harry would like to retire. Worse yet he may just die working on the Job! If something happens to Harry his wife would inherit the stock in the company. Being that she has health problems and she doesn't understand the business, John doesn't want her as a partner. An even worse scenario is if Harry's wife gifts the stock to her son, who she believes can do no wrong. In that case John could have a partner with a drinking problem.

 John and Harry are willing to enter into a buy sell agreement in advance should anything happen to Harry. All Harry wants is that the proceeds for his share of the business go towards taking care of his wife if he's not around. The problem is John can't figure out how to pay Harry's estate for his 50% interest. The business does well but not enough to buy Harry out at a potential future cost of $950,000.

Solution:  If the buy sell agreement is tied to a life insurance policy on Harry's life, and John or the business can afford to pay for the monthly premiums, then the payout of his partner's 50% interest is guaranteed by the proceeds of the life insurance.

The essential elements of this buy sell agreement is a properly drafted and enforceable legal document prepared by an attorney, and a life insurance product from a knowledgeable insurance agent. In addition the work of a qualified certified business valuation accountant may be required.

There are various tax implications for this type of scenario, which I will not discuss simply to keep it short. Further, there are lots of possibilities in how to structure the deal.

If you want to know more about how to establish a succession plan please give me a call. Your business is a very big part of your life. Don't just manage it day to day. Having an outside CPA that offers advisory services helps you look outside your field of vision and prepare for the future.