Securing the Life and Legacy of Your Family Business
Failure to develop an adequate plan for the disposition of a business interest at the death or disability of its owner could kill your business legacy. It may result in a forced sale of the interest whether it is a proprietorship, partnership, or a substantial stock ownership in a closely held corporation. A buy-sell agreement is often the only way to arrange for the disposition of the owner’s interest in a fair and equitable manner.
Buy-sell agreements are directed toward the continuance of the business interest after the death of one or more of the owners. The existence of a buy-sell arrangement is designed to eliminate the problems that may arise if the surviving owners are forced to become business associates of the decedent’s family. Not only may there be goal and personality conflicts, but inexperience and differing financial needs are potential business killers which could ultimately result in the financial death of a once-profitable enterprise.
A business without a buy-sell agreement is comparable to a person without a will. In each case, important decisions will need to be made. Allowing the property to pass according to a plan specified in the state law of intestacy, rather than according to the wishes of the decedent, might result in outcomes that are unintended by the individual and/or business owner. They might not be appropriate and, in the case of the business, could result in its sale to non-family members leaving remaining family and/or partners without income and often in debt.
Estate liquidity will be a paramount concern for survivors. Every business owner will want to assure the family of a fair and reasonable price for the business—not a liquidation price that may result from a forced sale. Finally, few people want their family’s future totally dependent upon the fortunes of a business venture which they no longer manage. A properly drafted business buy-sell agreement should accomplish the following:
- Pre-determine the business’s value for federal estate tax purposes
- Assure that any future growth in value accrues to benefit those responsible for the gain
- Provide sufficient cash to surviving business associates with which to purchase the decedent’s interest
- Assure a fair and adequate sales price
- Separate the family’s financial position from that of the business
- Transform illiquid assets into a liquid income-producing fund
Keeping your business alive while you’re running it is hard work. Keeping it alive after you pass it on is even harder work. A buy-sell agreement is a powerful tool to consider as you plan for the ongoing life of your business.
[Note: This article is not to be used as tax or legal advice. Always consult with local counsel or a tax specialist on all specific tax and legal matters.]