Business Succession Planning

The buy-sell agreement stipulates that the seller must sell and the buyer must buy, at a pre-determined value (adjust from time to time between the parties), and upon a predetermined event. Events triggering the provisions of the agreement include, but are not limited to, retirement, disability or death.

There are many forms of buy-sell agreements. The most common is the cross-purchase agreement whereby the remaining shareholders or partners, as the case may be, agree to purchase the departing owner’s share of the enterprise upon retirement, disability or death. The agreement is typically funded with insurance for death or disability but, for retirement, the remaining owners will typically have to fund the agreement through the profits of the business. Upon death, the insurance may still be used to confer a remaining benefit on the departing owner’s heirs. The retiring owner’s retirement income interest may be secured with a private annuity or a promissory note executed by the business itself and perhaps personally guaranteed as well. The foregoing strategies may also include survivor’s benefits for the owner’s spouse.

In cases where there are no other shareholders or partners, key employees should be considered as potential buyers under the agreement since they will best be able to run the business and generate the income needed to fund the owner’s retirement and/or pay the insurance premiums.

With the right amount of thought and expertise brought to bear on the problem of succession, the business will more likely be one of the few that confers benefits on the owner’s family for generations to come – leaving a lasting legacy to his or her dedication, hard work and foresight.