If you are one of the millions of Americans who is a small business owner, or who owns an interest in a small business, it is crucial that you incorporate business succession planning strategies and tools into your overall estate plan to ensure that your financial interest in the business is not lost if something happens to you. Because your business, and the financial interest you have in it, is unique, it is always in your best to work with your North Dakota estate planning attorney to decide what will be included in your business succession plan. One common business succession planning tool, however, is a simply buy sell agreement.
Why Is Business Succession Planning So Important?
If your business has reached a level where it is now successful, that success is a result of your hard work, commitment, and dedication. Whether that success translates to a modest financial interest or a substantial fortune, you undoubtedly want your loved ones to continue to reap the rewards and benefits of your success in the event something happens to you at any point down the road. Without a business succession plan in place, however, a number of things could go wrong if you become incapacitated or die, such as:
- Your business assets could be tied up in probate for many months, or even years, before they are available to your loved ones.
- Your loved ones could receive considerably less than fair market value for your interest in the business.
- The business could fail without a designated successor who is willing and able to take over in your absence.
- The business could lack sufficient liquid assets to cover estate taxes, resulting in the need to sell critical assets
One Popular Solution – a Simple Buy Sell Agreement
What can you do to prevent the unwanted consequences of your incapacitation or death mentioned above? There are a number of possible solutions that you may decide to include in your business succession plan after consulting with your estate planning attorney. One popular solution for at least some of the potential consequences of your incapacity or death is to enter into a simply buy sell agreement now. A buy sell agreement is a legally binding agreement you enter into with a buyer. The agreement sets forth the terms of the sale of your interest in the business in the event that certain events occur, such as death, disability, bankruptcy, divorce, or retirement.
Types of Buy Sell Agreements
The goal of a buy sell agreement, from the standpoint of the seller, is to ensure that if something happens to the seller, there will be a buyer for the seller’s interest in the business and that the seller’s loved ones will receive fair market value for the seller’s interest in the business. There are three basic types of buy sell agreements:
- Redemption arrangement – the business agrees to purchase the business interest from an owner upon the occurrence of some triggering event such as death, disability, or retirement. In a redemption arrangement, the business itself controls the funding and purchases the owner’s interest.
- Cross-purchase arrangement — the owners themselves, instead of the business, agree to buy each other’s business interest. Each business owner enters into the cross-purchase arrangement and is either obligated or has the option to purchase the business interest of his or her fellow owner upon the occurrence of a triggering event. For this type of arrangement to work, the individual owners must have the funds to purchase the exiting business owner’s interest.
- Hybrid arrangement — either the business or the owners have the option to purchase the business interest of an owner upon the occurrence of a triggering event.
Each of these three types of buy sell agreement ensures that there will be a buyer who is legally obligated to purchase your financial interest in the business upon the occurrence of specified events. Within the agreement you and the buyer also have the ability to define what events trigger the agreement as well as how the purchase price will be determined. Commons options for determining the value of the seller’ interest include a fixed price, a pre-determined formula, or an appraisal. Another common practice in a buy sell agreement is for the business and/or individual partners to purchase a life insurance policy, the proceeds of which are then used to cover the purchase price.
If you have additional questions about a simple buy sell agreement, contact the experienced North Dakota estate planning attorneys at German Law Group by calling 701-738-0060 to schedule an appointment.