The Kensington Company & Affiliates would like to thank Jeanne Brutman, LUTCF, CBFS, CFS for submitting this informative article.
What to Plan for in a Buy Sell Agreement to Prevent Loss of Business & Litigation.
The Goal: Transfer of Business shares in a life event to those who wish to keep the business and cash to those that need to be bought out due to the following circumstances:
- Death: The premature passing of a shareholder. Usually Funded with Life Buyout Insurance, assuming all involved are insurable.
- Disability: The Unplanned accident or illness of shareholder. Usually Funded with Disability Buyout Insurance, assuming all involved are insurable.
- Divorce: Prevention of spouse of shareholder from causing undue stress on other business partners during separation or divorce proceedings.
- Discontent: The inability of partners to co-exist in one corporation for any reason not related to legal or ethical violations.
- Marriage: Prevention of future spouses of shareholders from making claim to partial ownership of business in future.
- Retirement: The ability for any shareholder to leave at agreed upon time amicably. Usually funded through combination of cash value life insurance, corporate retirement plans and possibly installment payments from Annuity products or ongoing business revenue (least practical).
- Felony: The removal of shareholder that has legally or ethically endangered the company through their inappropriate actions.
It is usually recommended to go through some level of third party business evaluation of your business (not done by your cpa) every two to three years to substantiate the value of the business for IRS taxation purposes. Business valuation can be done from 3 different perspectives. sale of business to outside parties, estimation of estate taxes or internal buy sell agreement. This should be done as soon as possible to get a base line of the business value as it hits profitability. Flat value amounts can be used, but run the risk of out-dating rapidly and increased scrutiny from the IRS upon business transfer. Business valuation formula’s are more useful, but also have to be reviewed and possibly revised as the business changes structure over time. As mentioned above ,it is considered in good form to review the entire buy sell agreement and it’s formula’s or stated business value every 2-3 years, but. if the business is expanding or shrinking more rapidly, perhaps more often is advisable.