Calling all small business owners: do you know how you will exit your business in the event of retirement, sale, incapacity, or death? It's OK if you don't know, most business owners neglect to plan. As a result of the all too frequent lack of planning, business owners, partners, and their families often find themselves embroiled in contentious litigation over the value of the business, how to transition out of the business, and to what each owner is entitled.
So how does a business owner plan for such an event? The most common tool used is the "buy/sell agreement" executed by the business owners. Assuming the business owners want to continue the business going forward despite one owner being removed by the other owners, retiring, becoming incapacitated, or dying, the buy/sell agreement should be agreed upon long before such a "triggering event" occurs. A buy/sell agreement governs the transfer of ownership of a business when certain lifetime or death events occur ("triggering events"). The agreement defines the following so disputes are avoided:
- The valuation method of the business to calculate sale price
- The terms of the purchase of the business
- Outlines the tax planning of the sale
- Establish the value of the stock or ownership interests
Overall, the buy/sell agreement is intended to protect all the business owners by defining for each to whom they can sell their respective interests, at what price and terms, and under what restrictions. Further, the buy/sell agreement should be reviewed at least annually to ensure the goals of the owners are achieved, and their business protected from unnecessary disputes.
Further, a business's buy/sell agreement also must be considered in each individual owner's estate plan. The two plans are intimately intertwined to protect the wealth you have worked so hard to earn. For example, the proceeds from the sale of the business can be held by the owner's revocable living trust and devised as the owner wishes upon death.
Protect your business, the money you have strived to earn over your life, and your loved ones by planning ahead for your eventual exit from your business. If you have questions or you want to discuss your business's buy/sell agreement and related estate planning issues, contact our office today.