What will happen to your company if your business partner passes away? Will you own the company outright or will you share the company with the heirs of your business partner? These are questions most business owners don’t know the answer to because they do not have a buy-sell agreement in place. Without a buy-sell agreement, a business can face a world of financial and tax problems if an owner passes away, is divorced, retires, or leaves the company one way or another.

A buy-sell agreement makes sense for any business entity, including corporations, partnerships, LLCs and even proprietorships.

A chief concern of the owners of a closely held business is what would happen to the business if one of the owners could no longer continue. Surviving owners generally want to ensure a continuity of ownership and management without having the departing owner’s successor thrust upon them. Nor do they want to unduly compromise the liquidity needs of the business by funding a significant buyout. Disabled or deceased owners would want their families compensated fairly for their share of the business.

A properly drafted buy-sell agreement can achieve all of these goals by:

• Providing that upon the occurrence of a specified “triggering event,” owners are guaranteed that their interest in the business will be purchased;
• Providing that the owner’s interest must be sold to the company, the remaining owners, or a combination of the two;
• Providing a mechanism whereby the purchase price may be determined by market conditions in existence upon the occurrence of the event;
• Providing a funding source, primarily through insurance policies, so that the liquidity needs of the business or its owners will not be onerous; and
• Establishing a valuation of a deceased owner’s interest in the business for estate tax purposes.

The cost of having a buy-sell agreement drafted is miniscule compared to its benefits.  A buy-sell agreement can ward off infighting by family members, co-owners and spouses, and can keep the business afloat so that the business’s goodwill and customer base remain intact, and avoid liquidity problems that often arise in such circumstances.

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Example: You and your partner, Sammy, run an ice-cream stand as 50/50 partners.  You might have a written agreement or maybe just a mere handshake.  Sammy dies.  Do you still have a business?  Is Sammy’s wife or child your new partner?  Do you have the right or the obligation to buy them out?  If so, for what value and on what terms?  Can you strike out on your own with your own ice-cream stand, or are you stuck with the baggage of the old one?  What if you die instead of Sammy?

As the above example shows, even the most basic business can benefit from a buy-sell agreement, even if it’s the only written document that the business has.  Disputes and confusion can result without having a buy-sell agreement even in a small business, and the stakes go up with larger and more complex businesses.  You can have a buy-sell agreement with two owners or with many.  Suppose you have 10 owners in a family company and someone tries to transfer their shares to a competitor?  Such events are easy to prevent with a buy-sell but very expensive otherwise.

Let’s continue to use the above example. With cross-purchase provisions in a buy-sell agreement, if you or Sammy dies, becomes disabled, goes bankrupt, etc., the other can buy his share.  With redemption provisions in a buy-sell agreement, the business itself would make the purchase so the owners don’t individually go out of pocket.

Whichever provisions you choose to have in your buy-sell agreement, there’s lots of flexibility.  The buyout price might be fixed, determined by appraisal or by formula.  The buyout price might be paid in cash or via installments over time.  There can be different terms for different events, one price and certain terms for retirement, one for disability, and one for death.

It should also be noted that certain forms of insurance features are built into many buy-sell agreements.  You don’t have to use insurance, but it can ensure that there’s cash available when the time comes.  For example, whether you or Sammy die first, a life insurance policy on each of you can fund the buyout so your ice-cream stand stays afloat and so spouse/heirs are bought out as agreed.

You may find it difficult to face these issues today because of the myriad decisions.  But just about any properly drafted buy-sell agreement is better than none.  Besides, one of the beauties of the process is that buy-sell agreements are reciprocal.  No one knows for sure if you or Sammy will be the first to go by death, disability, retirement, etc.  That reciprocal nature makes negotiating and agreeing on these issues easier than you might think.

Executing a carefully planned buy-sell agreement can assure owners in a closely held business that their interest in the business they built is secure regardless of any unforeseen circumstances. In many cases this can be accomplished without putting excessive strain on the business’s cash flow, ensuring that the business and its remaining owners continue to succeed as well.

Other provisions to consider in a buy-sell agreement might be a noncompetition clause and a clause providing for the termination of the buy-sell agreement itself.

A competent and experienced business/tax attorney who specializes in drafting buy-sell agreements should draft your buy-sell agreement and advise each owner regarding their individual interests.

The Corporate Practice Group and the Tax Practice Group at Yedid & Zeitoune, PLLC collectively work together with each client to ultimately put together the best possible buy-sell agreement in connection with the needs of each client’s particular business model, taking into account all favorable tax treatments allowable. Have your legal structure squared away early on, and your business will be set for years to come. May all of us have great success in our business endeavors- amen.

The attorneys in the Corporate Practice Group and the Tax Practice Group at Yedid & Zeitoune have a combined 15 years of legal experience and are ready to assist you with all your corporate/tax needs.

Isaac Yedid, Esq. and Raymond Zeitoune, Esq.

Yedid & Zeitoune, PLLC

1172 Coney Island Avenue Brooklyn, New York 11230

Phone: (347) 461-9800          Fax: (718) 421-1695               Email: [email protected]

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