Quick show of hands for those of you out there with one or more partners in your business. (If you are a sole owner, you're not off the hook that easily – keep reading till the end of my article) How many of you...
- have a formal buy-sell agreement in place,
- have read it in the last year, and
- could accurately summarize what your buy-sell agreements states would happen in the event of a death/disability/departure of a partner?
If you're like the majority of business owners we see in our workshops and performance groups, I'm guessing the number of hands still left in the air by the last question is a bit sparse. That's a little scary, considering what's at stake here. The cost of dealing with a partnership that's gone bad without a good buy-sell can be significant. The reason I bring up this issue is because not only do I like to help people figure out how to make more money in their companies, I also like to help them keep it. Without a good buy-sell in place, you could be in jeopardy of losing a lot of your hard earn dollars.
For example, a company had three shareholders - the founding shareholder owned 60% of the stock, and two other shareholders owned 20% each. One of the 20% shareholders died suddenly. The spouse contacted the surviving shareholders and demanded to be bought out. Because there was no written agreement delineating who would purchase the deceased shareholder's 20% interest in the company and the price that would be paid for the shares, things got a little sticky, to say the least. In the absence of such an agreement, the spouse of the deceased shareholder entered into negotiations for the price of the stock with the two surviving shareholders. To make matters worse, the surviving partners didn't have anywhere near the funds with which to purchase the decedent's shares. As so often happens, their negotiations failed and the details finally got worked out in court. The resulting legal costs, time and energy spent were enormous and had a significant negative impact on the business for years to come, all of which could have been prevented with an effective buy-sell agreement in place.
In the most simple terms, a buy-sell agreement is a legal agreement between one or more parties, which outlines the manner in which the ownership of the company will transfer in the event of retirement, voluntary resignation, disability, or death of a shareholder/partner in a business. Think of it as a "partnership pre-nup." As with most relationships, business partnerships start off with the best of intentions, but often don't end up that way. Life and death happen. People move on, die, or suffer debilitating health problems. In my opinion, the best time to deal with such concerns is before the occurrence of a problem, not after.
A good buy-sell agreement addresses all of these possible occurrences, plus it will have:
- Some type of formula or appraisal method to determine the value of the stock
- Purchase terms in the event a stock buy out is triggered
- A non-compete clause that would hold up in court in the event that your partner(s) leaves and decides to open his/her own store
A lawyer experienced in buy-sell agreements can help you draw one up or review an existing one. A good insurance agent can review it as well and recommend cross life and disability insurance for your partners so that surviving family members can be bought out with the insurance policy proceeds. This is a good example of a project where a team approach involving several of your professional advisors is a great idea.
For you sole owners out there, a good buy-sell agreement is still essential. In virtually every state, when a single shareholder/owner of a corporation dies, the corporation will die or pass to the spouse or heirs of the decedent. In many cases, the surviving spouse is ill-equipped to run the company, dealing with the customers and clients of the firm, managing employees, and paying the bills, including estate taxes.
My intent here is not to scare but to create a sense of urgency among all of you to take action now. If you have an existing buy-sell, dust it off and read it with a "what-if" frame of mind and ask some of your experienced advisors to do the same. If you don't have one, get going now!