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Buy/Sell Arrangements The need for an application of a Buy/Sell in a business
Need for a Buy-Sell Agreement <ul><li>Provide for orderly transfer upon death, retirement or disability </li></ul><ul><li>...
Typically Structured in one of Two ways <ul><li>Cross Purchase Arrangement </li></ul><ul><ul><li>An agreement between the ...
Issues to Consider in a Buy/Sell agreement <ul><li>Prohibited transfers (Preserve the S election) </li></ul><ul><li>Income...
Structuring Buy/Sell agreements  <ul><li>Cross Purchase Approach </li></ul><ul><ul><li>Requires one or more of the remaini...
Structuring Buy/Sell agreements – Cont. <ul><li>Cross Purchase Approach – Cont. </li></ul><ul><ul><li>How is this treated ...
Structuring Buy/Sell agreements  <ul><li>Redemption approach </li></ul><ul><ul><li>Provides the entity with an opportunity...
Structuring Buy/Sell agreements – Cont. <ul><li>Redemption approach – Cont. </li></ul><ul><ul><li>How is this treated for ...
Structuring Buy/Sell agreements – Cont. <ul><li>Advantages/Disadvantages </li></ul><ul><ul><li>S- Corp </li></ul></ul><ul>...
Funding Buy/Sell Agreements <ul><li>Insurance proceeds </li></ul><ul><li>Accumulated Cash at entity level </li></ul><ul><l...
Funding Buy/Sell Agreements <ul><li>Insurance proceeds </li></ul><ul><ul><li>Preferred method due to non-tax status of pro...
Treatment of Life Insurance Premiums <ul><li>Term premiums </li></ul><ul><li>Whole life/Universal premiums </li></ul><ul><...
Establishing a Buy/Sell Price <ul><li>Multiple of earnings </li></ul><ul><li>Book value </li></ul><ul><li>Appraised value ...
Establishing a Buy/Sell Price <ul><li>IRS will recognize the pre-established buy/sell price for estate planning purposes i...
Buy/Sell Arrangements <ul><li>Buy/Sell Examples </li></ul><ul><ul><li>Buy/Sell exists, death, no insurance </li></ul></ul>...
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Sale of Business: Buy/Sell Agreements

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Sale of Business: Buy/Sell Agreements

  1. 1. Buy/Sell Arrangements The need for an application of a Buy/Sell in a business
  2. 2. Need for a Buy-Sell Agreement <ul><li>Provide for orderly transfer upon death, retirement or disability </li></ul><ul><li>Establish price </li></ul><ul><li>Provide a method for funding the sale </li></ul><ul><li>Maintain shareholder liquidity </li></ul><ul><li>Business Continuity </li></ul>
  3. 3. Typically Structured in one of Two ways <ul><li>Cross Purchase Arrangement </li></ul><ul><ul><li>An agreement between the shareholders/members providing a first right of refusal </li></ul></ul><ul><li>Stock/Interest Redemption Arrangement </li></ul><ul><ul><li>An agreement between the Corp./LLC and its shareholders/members providing a first right of refusal </li></ul></ul>
  4. 4. Issues to Consider in a Buy/Sell agreement <ul><li>Prohibited transfers (Preserve the S election) </li></ul><ul><li>Income allocations </li></ul><ul><li>AAA and inside and outside basis issues for an LLC </li></ul><ul><li>Others… </li></ul>
  5. 5. Structuring Buy/Sell agreements <ul><li>Cross Purchase Approach </li></ul><ul><ul><li>Requires one or more of the remaining shareholders/members to acquire the shares of the transferor. </li></ul></ul><ul><ul><li>Provides for a secondary market among shareholders/members </li></ul></ul><ul><ul><li>Non event for entity (generally) </li></ul></ul><ul><ul><li>Selling shareholder/member has a taxable event (sale) that may or may not result in taxable income. </li></ul></ul><ul><ul><ul><li>Death </li></ul></ul></ul><ul><ul><ul><li>Disability </li></ul></ul></ul><ul><ul><ul><li>Retirement </li></ul></ul></ul><ul><ul><li>Buyers obtain basis in their newly acquired shares/interests. </li></ul></ul>
  6. 6. Structuring Buy/Sell agreements – Cont. <ul><li>Cross Purchase Approach – Cont. </li></ul><ul><ul><li>How is this treated for an S corp.? </li></ul></ul><ul><ul><ul><li>What happens to AAA </li></ul></ul></ul><ul><ul><ul><li>What happens to outside basis? </li></ul></ul></ul><ul><ul><li>How is this treated for an LLC? </li></ul></ul><ul><ul><ul><li>What happens to outside basis? </li></ul></ul></ul><ul><ul><ul><li>What happens to inside basis? </li></ul></ul></ul><ul><ul><ul><li>What, if any, elections are required? </li></ul></ul></ul><ul><ul><li>How will this effect the member/entity going forward and in the event of a future sale? </li></ul></ul>
  7. 7. Structuring Buy/Sell agreements <ul><li>Redemption approach </li></ul><ul><ul><li>Provides the entity with an opportunity to acquire the shares of the transferor based on certain events </li></ul></ul><ul><ul><li>Redemption funds must come from the entity </li></ul></ul><ul><ul><li>Selling shareholder/member has a taxable event (sale) that may or may not result in taxable income. </li></ul></ul><ul><ul><ul><li>Death </li></ul></ul></ul><ul><ul><ul><li>Disability </li></ul></ul></ul><ul><ul><ul><li>Retirement </li></ul></ul></ul><ul><ul><li>Entity obtains basis in their newly acquired shares/interests. </li></ul></ul>
  8. 8. Structuring Buy/Sell agreements – Cont. <ul><li>Redemption approach – Cont. </li></ul><ul><ul><li>How is this treated for an S corp.? </li></ul></ul><ul><ul><ul><li>What happens to AAA </li></ul></ul></ul><ul><ul><ul><li>What happens to outside basis? </li></ul></ul></ul><ul><ul><li>How is this treated for an LLC? </li></ul></ul><ul><ul><ul><li>What happens to outside basis? </li></ul></ul></ul><ul><ul><ul><li>What happens to inside basis? </li></ul></ul></ul><ul><ul><ul><li>What, if any, elections are required? </li></ul></ul></ul><ul><ul><li>How will this effect the member/entity going forward and in the event of a future sale? </li></ul></ul>
  9. 9. Structuring Buy/Sell agreements – Cont. <ul><li>Advantages/Disadvantages </li></ul><ul><ul><li>S- Corp </li></ul></ul><ul><ul><ul><li>Cross purchase gives shareholders basis Redemption does not. </li></ul></ul></ul><ul><ul><ul><li>Cross purchase with various shareholders could be complex </li></ul></ul></ul><ul><ul><ul><li>Redemption only has one agreement </li></ul></ul></ul><ul><ul><ul><li>Redemption can drain entity resources as opposed to cross purchase which comes from shareholders/members </li></ul></ul></ul><ul><ul><ul><li>Do you want to rely on the entity or its shareholders/members? </li></ul></ul></ul><ul><ul><li>LLC - differences </li></ul></ul><ul><ul><ul><li>Cross purchase would allow for step up inside entity. </li></ul></ul></ul><ul><ul><ul><li>Redemption would not increase outside basis in the event of a sale. </li></ul></ul></ul>
  10. 10. Funding Buy/Sell Agreements <ul><li>Insurance proceeds </li></ul><ul><li>Accumulated Cash at entity level </li></ul><ul><li>Outside financing </li></ul><ul><li>Asset Sales </li></ul><ul><li>Deferred payments on an installment basis </li></ul>
  11. 11. Funding Buy/Sell Agreements <ul><li>Insurance proceeds </li></ul><ul><ul><li>Preferred method due to non-tax status of proceeds </li></ul></ul><ul><ul><li>Term or Permanent? </li></ul></ul><ul><ul><li>Limitations </li></ul></ul><ul><li>Accumulated Cash at entity level </li></ul><ul><li>Outside financing </li></ul><ul><li>Asset Sales </li></ul><ul><li>Deferred payments on an installment basis </li></ul>
  12. 12. Treatment of Life Insurance Premiums <ul><li>Term premiums </li></ul><ul><li>Whole life/Universal premiums </li></ul><ul><li>Effect of early cash out </li></ul><ul><li>Effect of payment on the policy through death </li></ul>
  13. 13. Establishing a Buy/Sell Price <ul><li>Multiple of earnings </li></ul><ul><li>Book value </li></ul><ul><li>Appraised value </li></ul><ul><li>Equal to insurance carried </li></ul>
  14. 14. Establishing a Buy/Sell Price <ul><li>IRS will recognize the pre-established buy/sell price for estate planning purposes if: </li></ul><ul><ul><li>The agreement must provide for an ascertainable pre-established price, either through fixed dollar amount or formula </li></ul></ul><ul><ul><li>The estate must be obligated to sell (first right of refusal is not enough) </li></ul></ul><ul><ul><li>The agreement must be a bona fide business agreement, subject to arm’s length negotiations and not a tax avoidance scheme. </li></ul></ul>
  15. 15. Buy/Sell Arrangements <ul><li>Buy/Sell Examples </li></ul><ul><ul><li>Buy/Sell exists, death, no insurance </li></ul></ul><ul><ul><li>Buy/Sell among members with insurance at corp. level </li></ul></ul><ul><ul><li>Buy/Sell with no insurance but limit on payout to cash flow. </li></ul></ul><ul><ul><li>Others… </li></ul></ul>

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