Now is a tremendous time to call on your small business owner clients or prospective clients to talk about buy-sell agreements–to review the one they have or to create the one they should have.
It is not lost on small business owners that the value they receive for their business in the event of death, disability, retirement, or sale is as important as ever. But that doesn’t mean they are doing anything about it. That’s where you as an advisor come in.
You might wonder if asking clients to review their “succession plan” would be better, as it might address more global issues. Although these terms can, in some cases, mean the same thing, the term “succession” can often carry with it more baggage than a small business owner may want. Furthermore, there is plenty of room to go global in the buy-sell agreement discussion, so be specific to ask about reviewing the “buy-sell agreement.”
Cornerstone of the plan
The buy-sell agreement is often the cornerstone of a succession plan; it is a key piece of the bigger puzzle, and if clients don’t have one, there is no way to hide it. If you ask when the last time it was reviewed, and they have to think about it, you can help them. If someone can honestly tell you he or she has reviewed the agreement within the last year and that it is up to date and funded, simply congratulate the individual and call on the next person on your list.
What this planning attempts to accomplish is to avoid surprises or conflicts for business owners and their families. A buy-sell that everyone agrees to and reviews regularly should eliminate the surprises, such as: no funding, dispute as to the sale price, a missed contingency or a sale offer that is less than a desired value. All of these surprises, and others, lead to headaches, fighting and un-productivity.
Your most important job is keeping your client focused on the big picture goal as the details are reviewed and debated. This is easier said than done, but shepherding these discussions while things can be thought through without pressure or dispute is meaningful and important work.
You don’t have to know all the legal aspects of buy-sell planning, but you do need to know the basics and the key questions that must be both asked and answered.
A buy-sell agreement is like a pre-nuptial agreement for business owner shareholders or partners. It is also sometimes referred to as a “business will.” The agreement is a legally binding contract (either separate from or a part of the partnership or business operating agreement) that controls future ownership of the business. It covers the potential “what-ifs” that could occur.
Those what-ifs include death, disability, retirement, the sale to a third party, bankruptcy and divorce of an owner. The idea is to preserve the continuity of the ownership of the business and to ensure that both the buyers and sellers feel the deal was fair. Along with the events that trigger a buy-out of an owner, a good buy-sell agreement will also detail who can buy shares of the business and at what price.
There are 4 primary forms of buy-sell agreements: (1) an entity (also called repurchase or entity redemption) agreement; (2); a cross-purchase agreement; (3) a wait-and-see (or mixed agreement); and (4) the no-sell buy-sell agreement.