You may have heard of shareholder agreements but have you heard of the more specific Buy-Sell Agreement? This is a fundamental succession planning tool when it comes to owning and operating a business. It is especially helpful in the case of family businesses.
What Is A Buy-Sell Agreement?
Similar to how a will dictates how assets will be transferred in death, a buy-sell agreement is a legal document that dictates where an owner or partner’s share of a business will go in the case of certain life events (i.e. death, retirement, etc.)
Having an agreement like this in place protects the family business. It protects family assets so that everything stays in the family’s control and so that nothing can be transferred outside the family. These agreements can dictate the succession of ownership.
How It Protects Your Family Business
Often, for a myriad of reasons, one family member or partner will try to sell their share of the business. This can cause issues if they’re trying to sell their share outside of the family.Without an agreement in place, they can sell their share off legally despite their intentions. Setting up a buy-sell agreement means you can dictate how shares and assets are transferred or sold. You can create certain stipulations that prevent a family member from selling outside the family.
It can also help to have an agreement in place in case of a divorce. In California, any assets acquired during a marriage qualify as community property. This means that a spouse of the family owner can lay claim to their share of the family business. If you create a strict buy-sell document that requires the spouse to sell their share back to the company in the case of a divorce, you can prevent the share from transferring outside of the family.
The agreements are meant to be put in place in preparation of certain life events. If there is a divorce, or a retirement or a death, a plan is in place to prevent chaos. It is also great to have in place in the case of incapacitation which can include dementia or other things that prevent a person from acting in a mentally sound way or making informed choices.
Having a buy-sell agreement can assure the long term survival of a family business. Why would you not want to have that added layer of protection?
A Buy-Sell Agreement…
- Ensures shares stay in the family
- Creates a special space where shares can be bought and sold under dictated parameters
- Identifies potential future events and conditions that trigger the agreement. These will determine what happens to that share
- Determines the valuation of business shares
- Specifies the source of funding for the purchase. Where does the money that will be paid in the transfer come from?
If you own a family business or a partner in one, you should consider the benefits of having a buy-sell agreement. That extra protection can ensure the longevity of your company. Live in the greater San Jose and Bay area? Set up your free consultation with Lonich Patton Ehrlich Policastri today.