Five facts about BuySell Agreements
Small businesses create most of the nation’s new jobs and employ about half of the private sector work force, according to the Small Business Administration. If history repeats itself, the Small Business Administration predicts small firms will play a significant role in leading the country’s economic recovery through innovations and the creation of jobs, enterprises and entire new industries.
Despite the recession, entrepreneurship continues to hold a wide appeal. One national study reported a rise in new business activity over the past two years. For some, owning a business is a viable alternative to being unemployed and/or trying to secure another corporate job. For others, it’s the fulfillment of a dream.
Whether you’re a new or experienced business owner or are thinking of starting a new company, if your business has more than one owner a Buy-Sell Agreement should be one of your top priorities. This document is a “must have” for you and any business partners in order to protect yourselves legally and financially. It’s a huge mistake to ignore the fact that sooner or later you or your partners may want to retire or move on, or may pass away or become disabled.
A Buy-Sell Agreement essentially governs the rights and obligations of business partners. Here are five facts you should know:
1. A Buy-Sell Agreement is created by business owners for the purpose of establishing the price at which an owner would be compensated for his interest in the business in a variety of circumstances. There are a number of ways in which a business owner may leave the company, including retirement, disability, or conflict between partners. Or, a partner may die suddenly, leaving the surviving spouse or family to address all outstanding business issues. Under such circumstances, there is often tension between the departing partner (or his estate) and those who are continuing the business. This especially pertains to the amount the departing individual (or estate) should be paid for his share of the business. It is not uncommon for this scenario to result in not only bad feelings between long-time partners, but in expensive and time-consuming litigation. A well drafted, comprehensive Buy-Sell Agreement created by the owners before anyone leaves the business is the best way to avoid conflict when one partner departs.
2. Without a Buy-Sell Agreement in place, the surviving family members of a deceased partner may not receive full and fair value for the deceased’s share of the business. For small to medium-sized business owners, the company’s value is often a significant asset of a deceased owner’s estate. However, when a business owner dies, converting that value into a resource for a surviving family is difficult unless there is a comprehensive Buy-Sell Agreement in place. This agreement typically requires the business or the surviving owners to purchase the deceased’s interest at a price determined by the agreement.
3. Without a Buy-Sell Agreement in place, the surviving business owners may find themselves with an unwelcome partner in the form of the deceased owner’s spouse or children. If a business owner dies leaving her estate to her spouse or children, which means her interest in the business also passes to those beneficiaries. Family members may inherit the accompanying right to vote shares of stock, become a member of the board of directors of the company, appoint officers, and participate in the day-to-day management of the business. For most business owners, this is a frightening scenario regardless of how fond they may be of their partner’s family. A well drafted Buy-Sell Agreement will prevent this from happening.
4. Business owners who do not review and update their Buy-Sell Agreement on a regular basis may find themselves no better off than those who have no agreement in place. Since the value of small and medium-sized businesses can change rapidly, it is imperative for owners to review and update their Buy-Sell Agreements at least every two years. In addition to changes in the value of the business, changes may occur in an owner’s individual circumstances, within the company, and in the law, which could have a serious impact on the agreement.
5. Failure of a business owner to coordinate her estate plan with a Buy-Sell Agreement may result in higher taxes and missed opportunities for planning. Since the value of the business often is a significant part of an owner’s estate, a comprehensive Buy-Sell Agreement is a vital aspect of the business owner’s estate plan. A poorly drafted or outdated Buy-Sell Agreement could mean the deceased business owner’s family receives less than full value for the business, yet the estate would still be taxed on the full fair market value of the business. A well-drafted Buy-Sell Agreement that is reviewed and updated on a regular basis will prevent such an outcome.
Attorney Suzanne Sayward is president of the Massachusetts Chapter of the National Academy of Elder Law Attorneys (MassNAELA), and is a partner with the Dedham firm Samuel, Sayward & Baler LLC. For more information about Buy-Sell Agreements and a broad range of legal topics related to estate planning, estate settlement, and elder law, visit www.ssbllc.com.
Published on 07/11/2009 15:47:08