December 2, 2014

Avoid the horror show, get a buy-sell arrangement done (part one)

Small business owners have enough on their mind, but some things just need to get taken care of. If you are an owner of a company with at least one partner, a buy-sell arrangement is one of those things. Buy-sell arrangements are the legally binding framework and roadmap to the divesting on an owners stake in a business depending on a variety of factors. For the purposes of this blog post we will be focusing primarily on the death of an owner.

One of the most important reasons to get a buy-sell arrangement done is to protect owners against a worst case scenario, the untimely death of a partner. It’s a tragic consequence when this occurs, and something that becomes a life altering event when it happens on a lot of levels. When it includes an ownership stake in a company with other partners, that consequence involves that many more people. It is unfortunate that such an event can trigger the dissolution of a company unless steps and a process are in place.

When such an occurrence takes place there is going to be an issue with the estate and heirs of the deceased owner. What comes next without a plan in place can be ugly, especially if the company does not have a set valuation process and means to fund a buyout. Without an arrangement, the owner’s stake is going to pass to the owners heirs or estate. Without an arrangement in place, surviving owners have a couple of options, neither good nor practical.

On one hand, the surviving owners can establish their own means of funding in order to buyout the deceased owner’s heirs. There are two problems here, first is whether the surviving owners can line up that kind of financing. Surviving owners will likely need to approach a bank in order to set up the kind of financing needed to accomplish such a buyout, this may not be easy in and of itself, but what if the owners have a certain value in mind and a deceased owners heirs disagree. Maybe the heirs think the company is worth more than surviving owner say, maybe the heirs think they are being taken for a ride. It’ll be an emotional time and no place to start throwing large numbers around.

Which brings us to the second impractical option, say hello to your new partners. Now maybe the heirs of an owner are knowledgeable, reasonable people who simply want to keep the stake intact and retain ownership passed onto them as a silent partner, best of a bad situation. Worse than that is a new owner who wants to come in a turn things upside down. The husband or wife who wants to start making all the decisions or the idiot know-it-all son or daughter. This is where things go from bad to worse and makes for an untenable situation.

Either one can lead to a forced liquidation of the company in time.

Avoid it…. avoid it all. A simple buy/sell arrangement can set in stone a means to value the company, and the means to finance it. Find a good attorney with experience in drafting such a document to see to it that all the issues are covered and that any unique circumstances related to your company will be attended to. From there, purchase life insurance policies to finance a buyout in the case the death of an owner. Such an occurrence will trigger the buyout based on an agreed upon valuation in the arrangement and insurance proceeds will be used to pay for a surviving heirs company stake. The share of the deceased owner will come back into the company and distributed amongst the surviving owner per the agreement.

It doesn’t cost much to get things done and it beats having to deal with the alternative. It becomes more important the more stakeholders there are because face it… things happen, the unexpected occurs and companies need to be prepared.

For more information on the topic or guidance, use the form below or reach out directly to Nathan Therrien at 978-400-7014 or at [email protected]


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