Introduction. Businesses with more than one owner typically address death/disability/retirement in a “buy-sell” agreement. The agreement provides that under certain triggering circumstances, the departing partner will sell and the remaining partners will buy the seller’s interest.
Different Motivations. The interest of the remaining partners is to make sure that the ownership and control of the business remains in the hands of those who are still active. The interest of the departing partner is to make sure that he (or his heirs) are fairly compensated for their share of the business. A well-drafted agreement accounts for both interests.
Variables. The actual terms of a particular buy-sell agreement will vary greatly depending on each business. Here are some key issues to think about:
- When a partner departs, how will the value of the interest be determined?
- When a partner departs, may the business or the partners demand that the other party buy or sell their interest? (“Put” or “Call”)
- If there is an obligation to buy or sell, is that for 100% of the seller’s interest or a smaller percentage?
Funding: It is critical to evaluate how the surviving partners will pay for the buyout. From operating cash flow? From a loan? From insurance? From a combination of both? Be sure to run detailed projections for financing the buyout to make sure your plan is feasible. Also consider carefully the tax treatment of the different funding mechanisms.
The above list is just a primer of several key considerations in setting up a buy-sell agreement. Freedom Family Office regularly helps structure buy-sell agreements for business owners. Please contact us if we can be of help: peter@freedomfamilyoffice or 917.697.4156.