How to Protect Your Business with a Buy/Sell Agreement
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How to Protect Your Business with a Buy/Sell Agreement

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As a business owner, one of your primary concerns is overseeing the health of your business. Therefore, we have prepare this presentation so you can learn how to protect your business with a Buy/Sell ...

As a business owner, one of your primary concerns is overseeing the health of your business. Therefore, we have prepare this presentation so you can learn how to protect your business with a Buy/Sell Agreement. So lets get started!

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How to Protect Your Business with a Buy/Sell Agreement How to Protect Your Business with a Buy/Sell Agreement Presentation Transcript

  • Buy/sell Agreements How To Protect Your Business by FitSmallBusiness.com
  • As a business owner, one of your primary concerns is overseeing the health of your business.
  • But what would happen if one of your partners was no longer able to perform his or her duties effectively?
  • You will need to have a plan in place which describes what would happen if you or one of the other co-owners has to leave the company.
  • What is a Buy/Sell Agreement? (Also known as a buyout agreement)
  • What is a Buy/Sell Agreement? (Also known as a buyout agreement) Is a legally binding contract designed to deliver a detailed game plan for how the remaining co-owner(s) are to carry on in the event one of you leaves the business.
  • This Departure could be the result of a number of different factors
  • This Departure could be the result of a number of different factors Including retirement, desire to sell shares, disability, divorce, individual debt default or bankruptcy, disagreements among the owners, or death.
  • Why You Need One
  • Some refer to the Buy/Sell as a “business will.”
  • Some refer to the Buy/Sell as a “business will.” It is designed to protect the company – to make sure important things are taken care of – if someone leaves.
  • advantages: • It maintains the continuity of your business by making sure members get to decide what happens to the business before trouble arises.
  • advantages: • It maintains the continuity of your business by making sure members get to decide what happens to the business before trouble arises. • It protects company ownership by laying out a succession plan for departing members. This keeps remaining members from being saddled with untested successors.
  • advantages: • It minimizes disputes between remaining co-owners and the family of the departing owner by having a strategy in place ahead of time to govern business operations.
  • advantages: • It minimizes dispute between remaining co-owners and the family of the departing owner by having a strategy in place ahead of time to govern business operations. • It alleviates co-owner stress and uncertainty by specifically identifying which events would trigger a buyout.
  • advantages: • It protects business assets and liquidity by providing a financial (and tax) plan for each of the different triggers addressed in the agreement.
  • advantages: • It protects business assets and liquidity by providing a financial (and tax) plan for each of the different triggers addressed in the agreement. • It protects the interest of, not just the business entity itself, but also that of the business owners (and their families in the case of death/disability) to ensure are handled with respect, courtesy and the utmost fairness.
  • Buy/Sell Agreements are typically structured in one of two ways:
  • cross-purchase Allows remaining owners to buy out the ownership interest of the departing co-owner.
  • cross-purchase Allows remaining owners to buy out the ownership interest of the departing co-owner. Redemption Enables the business entity itself to reclaim the ownership interest of the departing owner.
  • No matter which type of agreement you choose, it will need to address four key business issues: • The Succession Plan • Triggering events • Funding Sources • Buyout Price
  • Succession Plan The first question your Buy/Sell Agreement should answer is this:
  • Succession Plan The first question your Buy/Sell Agreement should answer is this: Who can buy the departing owner’s shares or interest in the company?
  • Succession Plan The loss of key personnel can be devastating for a business.
  • Succession Plan The loss of key personnel can be devastating for a business. It affects how the business is managed and impacts company sales, creditworthiness, market share and its overall market value.
  • Triggering events What will trigger a buyout? Triggering events guarantee owners that upon the occurrence of specific events their shares of stock will be bought out.
  • Triggering events What will trigger a buyout?
  • Some of the most common reasons for buyout are:
  • Some of the most common reasons for buyout are: disability, divorce, debt and death.
  • disability An owner who has become disabled and is no longer able to perform his or her duties may need to be bought out in order to protect the integrity and liquidity of the company. The Buy/Sell Agreement should specifically define what constitutes a disability.
  • divorce An owner who is in the midst of a divorce may be bought out to protect the company’s ownership. It’s not uncommon for a family law judge to order a business owner to split his or her interest in a company with the former spouse.
  • divorce A clause which ensures the former spouse will sell those shares back to one of the company’s original owners or to the company itself can protect your company from being torn apart.
  • Debt Credit isn’t easy to come by and a blow to your company’s credit rating can result in thousands of dollars in unnecessary fees being levied on your business.
  • Debt Credit isn’t easy to come by and a blow to your company’s credit rating can result in thousands of dollars in unnecessary fees being levied on your business. Particularly for small businesses, individual owners are often on the hook as personal guarantors for any and all business debt.
  • Death The death benefit paid to the family of a deceased owner is going to be the largest buyout payment of any of the aforementioned triggering events.
  • Death It is often the case that key personnel / coowners are covered by company-paid life insurance policies which are issued with a face value equivalent to the buyout price. If a shareholder dies, the life insurance policy pays the company and the company buys shares back from the decedent’s family.
  • Funding sources Where will the money come from to complete the buyout?
  • Funding sources Where will the money come from to complete the buyout? Are the individual owners responsible for initiating the buyout?
  • Funding sources Where will the money come from to complete the buyout? Are the individual owners responsible for initiating the buyout? Or will the company be used as the funding source to buy out a departing co-owner?
  • Funding sources Businesses often have insurance policies in place to cover the expenses of funding a buyout when necessary.
  • buyout valuation What is the price of the buyout? Buyout prices vary depending on the buyout trigger and market conditions.
  • buyout valuation What is the price of the buyout? Buyout prices vary depending on the buyout trigger and market conditions. Company appraisals can help ensure the company does not overpay for shares as well as ensure beneficiaries are not underpaid for their shares. Each trigger could have a fixed price
  • The rule in business is always to prepare abundantly before.
  • The rule in business is always to prepare abundantly before. You can’t predict the future and often, you can’t stop hard times from touching your business. You can do what’s necessary to minimize its impact, however.
  • And Finally...
  • To learn how to simplify the process of running your business visit us at....
  • www.FitsmallBusiness.com Thanks for watching Click here to tweet this presentation.