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July 25, 2010 at 08:00 PM
For business owners, retirement isn’t as simple as turning in retirement papers and walking out the door with a gold watch. For most owners, retirement is not even an event; it is rather a journey as the owner reduces and eventually discontinues involvement in the daily operation of the business.
Many owners plan to pass their business to one or more children who are ready to take over management functions and continue its successful operation. Others want to sell to remaining owners, a key employee or an outside party. In any scenario, the owner plans to use the sale proceeds to meet retirement income needs or to provide family survivor income needs in the event of a premature death.
As an advisor, your job is to help your client identify how the transition will take place, then set into motion the steps necessary to accomplish it.
From Concept To Contract
Once the transition plan is agreed on, the next step is to put the plan into writing. This is accomplished by drafting a buy-sell agreement: a legal contract that sets the terms and conditions for the sale of the business, whether at the owner’s death or during his or her lifetime.
Your client may ask, “What is so important about having a buy-sell agreement?”
When an active owner leaves the business, there may be unavoidable competing interests between family members or other owners. For example, a retiring owner may have a significant stake in the continued success of the business. Without a successor management team in place, the retiring owner may be reluctant to give up control, adding organizational stress and jeopardizing the transition. Family members of a deceased owner may also have an inflated idea of the value of the business and expect to maintain an income or be given a job.
As a planning tool, a buy-sell agreement can help ensure the orderly transfer and continuation of a business beyond the voluntary or involuntary departure of an owner. Most importantly, the terms of the sale are decided before the event takes place, when all parties have equal bargaining power and a discussion of the costs and risks of events such as death, disability or retirement can be weighed.
Buy-Sell Provisions
A buy-sell agreement typically includes provisions that:
? Create a purchase and a sell obligation to the parties named in the agreement.
? Outline triggering events that will cause a sale to take place. Common triggering events include death, disability and retirement of an owner. Other triggers may include bankruptcy, divorce or loss of professional license.
? Establish the value of the business and outline the process to value the business in the future.
