We’ve mentioned the importance of a buy-sell agreement. It’s the natural corporate or partnership extension of estate planning. Setting the procedures for what happens if a partner or key shareholder dies or becomes so infirm that he or she cannot complete their tasks is in everyone’s best interest. These kind of documents establish how your business’ shares are disseminated in the event of a major life event and ensures the business continues.
In my experience, all the effort is focused on matters occurring “in the event of death.” It’s important, sure, but in my experience, death is less likely to occur while you’re a business owner than:
⦁ disability (caused by an accident or health reasons)
These are lifetime transfer events that are far more common and can be much more difficult to manage.
One of these could lead to another. You would not want to renegotiate your buy-sell agreement after one of these events have occurred. It can be costly and you may inadvertently burn some bridges along the way.
Here’s a quick anecdote about business partners who thankfully had a buy-sell agreement early on.
Consider This Scenario
Beth and Richard were two friends who, after years as respective peanut butter and jelly mavens, joined forces to start a business in an urban area based around their gourmet products.
Business went well for a few years until Richard’s wife divorced him. Thankfully, because of some provisions previously discussed, his ex-spouse could not claim any ownership of the company. However, as the ink started to dry on his divorce, Richard’s focus turned elsewhere and he exhibited patterns of mismanagement with important funds and shipments of jelly. He then started dating another woman who wanted him to move out-of-state with her. That would’ve been fine, but the peanut butter and jelly business depended on local buyers and required Richard’s presence. He regularly met with neighborhood retailers, many of whom were acquired thanks to his involvement.
Richard insisted he could handle his professional and personal commitments but Beth had little faith and preferred to buy out his shares of the company and replace him. Richard took this very personally and stopped returning phone calls and emails. His inaction was evidence that he was no longer motivated to keep the business thriving.
A Potentially Sticky Situation
The two pulled out copies of their buy-sells.
They could have annulled the original buy-sell and hired a certified business appraiser determine the business’ fair market value. But that also ties things up and opens the door to litigation, which we always want to avoid.
In essence, the buy-sell designed to prevent that altogether. Thankfully, they were careful and honest in the beginning by drafting one.
The agreements were reviewed and found the appropriate, ethical way to have Richard exit the business with his rightful amount. Beth continues to operate the PB&J business with a new partner who owns less shares than Richard.
By focusing on matters other than death, we avoided:
⦁ a spouse inheriting, or getting involved with, the business
⦁ mass confusion
The buy-sell helps you prepare for success as well as failure, and Brinen & Associates can help you draft the one suits your company best.