Source: https://blog.meadenmoore.com/blog/business-succession-planning-keeping-your-buy-sell-agreement-relevant
Timestamp: 2020-05-28 17:54:48
Document Index: 89957623

Matched Legal Cases: ['art 6', 'art 1', 'art 2', 'art 3', 'art 4', 'art 5', 'art 7', 'art 8']

Business Succession Planning: Keeping Your Buy-Sell Agreement Relevant
Posted by Meaden & Moore on Jul 17, 2014 8:00:00 AM
Part 6 of the "Process-Oriented Approach to Family Business Succession Planning" Blog Series
All too often, when I first broach the subject of a succession plan with a client, I receive a terse response, and an attempt to summarily dismiss the topic for fear that I have run out of things to keep me busy and am looking to up-sell them on a matter that they believe is well in hand.
First, let me assure you that I have plenty to occupy my time, and am not looking to generate busy work for my clients or myself. But upon further inquiry, I find all too often that what many business owners believe is that a succession plan is merely a simple buy-sell agreement, and that they haven’t really reviewed or revised that agreement since it was adopted several years earlier.
Now, please don’t get me wrong, a relevant buy-sell agreement can be an integral part of a comprehensive business succession plan, but it certainly does not stand as a succession plan on its own. And while I will always advocate for any well-managed closely-held business to adopt a written succession plan, and to communicate that plan with all interested stakeholders, I am not so naive as to think that this goal is consistently met in practice.
Two Reasons to Update Your Buy-Sell Agreement
So over the years I have found that the discussion about the buy-sell can yield two favorable results. First, you can update the buy-sell so that it remains relevant under current business circumstances. But a second important by-product of the update of the buy-sell is to serve as a catalyst for adoption of a formal succession plan. This post, therefore, will focus on why it is important to pull a copy of that old buy-sell agreement out of the filing cabinet, thoroughly review its terms, and update the document as it may be necessary.
While buy-sell agreements may vary wildly in complexity, at their core, there are just a handful of important moving parts. These include the parties to the agreement, the stated restrictions on transfer, the triggering events, the price at which transactions will occur, and the payment terms. And the terms of the agreement that may have made perfect sense several years ago may now be unwieldy, at best, or irrelevant, at worst.
How to Conduct an Annual Review of the Buy-Sell
Consequently, a careful annual review of the buy-sell should be on any business owner’s agenda of best practices. How should such a review be conducted?
First, review the parties to the agreement. Have there been changes in the ranks of shareholders, and are all current shareholders party to the agreement?
Next, consider the terms of the agreement itself. Does the agreement provide for outright restrictions on transfer? Should there be exceptions if all shareholders consent? Should estate planning trusts be considered permitted transferees?
Then consider what events should trigger a transfer among shareholders? The death of a shareholder is usually addressed in all agreements. But should other contingencies be addressed such as disability? Retirement? Termination? What if a shareholder simply decides it is time to quit? Will the company purchase the shares or will the obligation fall on other shareholders? Will the transfer be at the option of the parties, or will the transfer be required?
Finally, determine the transfer price and payment terms. At what price should a transfer take effect? Will the shareholders agree to the value? Should a professional valuation be commissioned? Should valuation discounts be considered for minority interests? Should the price be adjusted downward if a shareholder simply decides it is time to quit? And once determined, how should the obligation be paid? Cash reserves or cash-flow may have covered payment obligations when the agreement was first adopted, but what if the value of the company has increased substantially? Will reserves or cash-flow suffice? Should insurance be considered? Is commercial borrowing an option?
By now, I hope that you are getting the picture. It’s time to get to work!
Some say the only constant in life is change. Is your buy-sell keeping up with the needs of your dynamic business? Perhaps it is time to pull the agreement out for a serious review and potential overhaul. And while you are at it, is it time to give some serious thought to your answer to the question “Do you have a succession plan?”
Read other posts in our "Process-Oriented Approach to Family Business Succession Planning" Blog Series:
Part 1: Effective Business Succession Planning: A Call to Action
Part 2: 18 Must Answer Questions for Family Owned Business
Part 3: Balancing Family Relations with Family Business
Part 4: Identifying the Business Owner's Goals - Cash Flow and Financial Planning
Part 5: Identifying the Business Owner's Goals - Taxes
Part 7: Business Succession: Who Are the Stakeholders and How Can You Satisfy Them?
Part 8: Don't Let the Failure to Communicate be Your Business Succession Plan's Downfall