As a family business begins the legacy planning process, a buy-sell agreement can be one foundational tool. It provides a written agreement of how ownership will transfer at the time of the death or incapacity of one of the owners.
I see a buy-sell agreement with two sides. First, it provides an agreement about how the heirs of the deceased or disabled owner will receive fair value for the owner's share of the business. Second, it provides guideline about how ownership will transfer.
Here are four questions to ask to see if you need a buy-sell agreement in your legacy plan:
1. Do the heirs of the current owners rely on the value of the business for their future needs? Will mom need to be paid out of the business in order to keep the monthly bills paid, if dad should die? Will the spouse of the managing partner need to be paid out of the business to keep monthly bills paid? The agreement can specify a transfer price, or a method to determine that price, and often uses life insurance to provide the funds to buy out the heirs as needed.
2. Is ownership by outsiders undesirable? Many family organizations prefer that ownership remain in the family and sometimes require ownership to stay with blood relations. A buy-sell agreement can ensure that ownership interest cannot pass outside the existing owners without their approval.
3. Is ownership by outsiders acceptable, but only sometimes? If so, the agreement can spell out requirements for new owners and how new owners would be approved by the existing ownership.
4. Can you see trouble on the horizon? Consider all the "what ifs" of future ownership. A discussion with existing owners and a qualified attorney can help sort out the options. I was in a meeting once where the attorney began this conversation by saying, "OK, we will kill you first, Bob." It was a little jarring at the time, but the conversation about how to handle the death, divorce or remarriage of each owner was extremely valuable.
A thoughtful buy-sell agreement can prepare for the most likely issues that could arise and provide a process for all owners to have first right of refusal on any new owners.
The opinions of Rich Dunn are not necessarily those of Farm Futures or the Penton Farm Progress Group.