What happens at an owner’s death, disability, retirement or withdrawal is typically addressed in the business entity’s buy-sell agreement. This agreement should be reviewed annually to make sure it is kept up-to-date with changes in the owners’ intentions, such as any change in the value of the entity and what the purchase price will be to buy an owner’s interest in the entity when a triggering event occurs.
If there will be a buy-out of an owner’s interest in the company at the owner’s death, it is important to consider whether life insurance will need to be purchased on the owner’s life to ensure that the purchase price can be paid in a way that is not detrimental to either the business or the deceased owner’s family.
Doron M. Tisser, Esq., has written the chapters on “Corporate Buy-Sell Agreements” and “Partnership Agreements” for the book Business Buy-Out Agreements, published by the California Continuing Education of the Bar. These chapters discuss how to establish agreements to provide for the continued operation of a business upon an owner’s death, disability, retirement or withdrawal.
Exit Planning is important if a business owner is thinking about selling the business within two to seven years, in order to maximize the value of the business for potential buyers. Different business owners will address Exit Planning in different ways.
If the intent is to sell to an outside buyer, the business needs to be organized so that a potential buyer sees a well-run organization he or she can step into. While many businesses are run profitably, they may not be set up in a manner that will make them attractive to a potential buyer.
If the business owner wants to sell the business to employees, a different set of planning must be done. For instance, will the buyout be done through an Employee Stock Ownership Plan (ESOP) or will the employees have to look to outside financing to buy the business? Will the employees need to get insurance on the owner to help with the purchase of the business?