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October 25, 2010 at 08:00 PM
Most all closely held businesses, especially multi-owner corporations and partnerships need to have a buy-sell agreement to facilitate a smooth transition of ownership upon the occurrence of several events, namely the “Eight D’s.”
We’ll discuss each one individually in the corporate context; however, most of the eight D’s would also apply to partnerships. In a single-owner business, the buyer could be key employee(s), a competitor, a supplier, or a customer.
The Eight D’s
1. Death of a shareholder–In the event of a death of an owner, the business can suffer a financial setback (key person loss). This problem can be compounded if the surviving shareholders have to take in a deceased owner’s spouse as a new partner.
He or she may have little knowledge of the business, yet expect a salary and profits from the business. A harmonious transition of the business can be accomplished with a buy-sell agreement fully funded with life insurance coverage.
2. Disability of a shareholder– While most buy-sells take into account death (though the agreement value may be low or underfunded), many totally ignore what could be a more serious financial drain: disability (the living death). Alternatively, disability may be poorly defined (if at all), not funded or underfunded.
A disabled shareholder would expect his or her salary to continue and would expect to get a share of profits. If the disability were extended, how long could the business keep paying? All of these issues should be addressed in the agreement. The buy-sell should be a business decision based on previously agreed-upon terms, not on emotions. And, of course, the agreement needs to be fully funded.
3. Departure of a shareholder–When a shareholder leaves the business, whether for regular retirement or early voluntary retirement, his or her business interest should be purchased. The purchase price can be the same as or less than the death price (it cannot be more).
A lower purchase price might be set for early termination. As for retirement planning, a life insurance policy can provide a death benefit. And cash values can be used as a retirement supplement.
