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Recently, the critically acclaimed television show \u201cSuccession\u201d aired its final episode. If the series accomplished anything, it was depicting the chaos and uncertainty that can take place if a long-time business owner fails to establish a clearly written and communicated succession\u00a0plan.<\/p>\n
While there are many aspects to succession planning, one way to put some clear steps in\u00a0writing \u2014 particularly if your company has multiple owners \u2014 is to draft a buy-sell agreement.<\/p>\n
Avoiding conflicts<\/strong><\/p>\n A \u201cbuy-sell,\u201d as it\u2019s often called for short, is essentially a contract that lays out the terms and conditions under which the owners of a business, or the business itself, can buy out an owner\u2019s interest if a \u201ctriggering event\u201d occurs. Such events typically include an owner dying, becoming disabled, getting divorced or deciding to leave the company.<\/p>\n If an owner dies, for example, a buy-sell can help prevent conflicts \u2014 and even litigation \u2014 between surviving owners and a deceased owner\u2019s heirs. In addition, it helps ensure that surviving owners don\u2019t become unwitting co-owners with a deceased owner\u2019s spouse who may have little knowledge of the business or interest in participating\u00a0in\u00a0it.<\/p>\n A buy-sell also spells out how ownership interests are valued. For instance, the agreement may set a predetermined share price or include a formula for valuing the company that\u2019s used upon a triggering event, such as an owner\u2019s death or disability. Or it may call for the remaining owners to engage a business valuation specialist to estimate fair market\u00a0value.<\/p>\n By facilitating the orderly transition of a deceased, disabled or otherwise departing owner\u2019s interest, a buy-sell helps ensure a smooth transfer of control to the remaining owners or an outside\u00a0buyer.<\/p>\n This minimizes uncertainty for all parties involved. Remaining owners can rest assured that they\u2019ll retain ownership control without outside interference. The departing owner, or in some cases that person\u2019s spouse and heirs, know they\u2019ll be fairly compensated for the ownership interest in question. And employees will feel better about the company\u2019s long-term stability, which may boost morale and retention.<\/p>\n Funding the agreement<\/strong><\/p>\n There are several ways to fund a buy-sell. The simplest approach is to create a \u201csinking fund\u201d into which owners make contributions that can be used to buy a departing owner\u2019s shares. Or remaining owners can simply borrow money to purchase ownership\u00a0shares.<\/p>\n However, there are potential complications with both options. That\u2019s why many companies turn to life insurance and disability buyout insurance as a funding mechanism. Upon a triggering event, such a policy will provide cash that can be used to buy the deceased owner\u2019s interest. There are two main types of buy-sells funded by life insurance:<\/p>\n 1. Cross-purchase agreements.<\/strong> Here, each owner<\/em> buys life insurance on the others. The proceeds are used to purchase the departing owner\u2019s interest.<\/p>\n 2. Entity-purchase agreements.<\/strong> In this case, the business<\/em> buys life insurance policies on each owner. Policy proceeds are then used to purchase an owner\u2019s interest following a triggering event. With fewer ownership interests outstanding, the remaining owners effectively own a higher percentage of the company.<\/p>\n A cross-purchase agreement tends to work better for businesses with only two or three owners. Conversely, an entity-purchase agreement is often a good choice when there are more than three owners because of the cost and complexity of owners having to buy so many different life insurance policies.<\/p>\n Getting expert guidance<\/strong><\/p>\n Creating, administering and executing a buy-sell agreement calls for expert assistance. Our firm can help you identify, gather and organize the relevant financial information involved.<\/p>\n \u00a9 2023<\/em><\/p>\n <\/body> Recently, the critically acclaimed television show \u201cSuccession\u201d aired its final episode. If the series accomplished anything, it was depicting the chaos and uncertainty that can take place if a long-time business owner fails to establish a clearly written and communicated succession\u00a0plan. While there are many aspects to succession planning, one way to put some clear […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7,14,10],"tags":[8,11,12],"class_list":["post-16647","post","type-post","status-publish","format-standard","hentry","category-articles","category-business","category-news","tag-articles","tag-news","tag-updates"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/16647","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=16647"}],"version-history":[{"count":1,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/16647\/revisions"}],"predecessor-version":[{"id":16648,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/16647\/revisions\/16648"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=16647"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=16647"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=16647"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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