Top 10 Buy-Sell Checklist
1. Death of a shareholder
In the event of an owner's death, business can suffer a financial setback (key person loss), compounded if the surviving shareholders must take in a new partner such as the deceased owner's spouse. He or she may have very little knowledge of the business, yet expect a salary and profits from the business. Harmonious transition of the business can be accomplished with a
buy-sell agreement fully funded with life insurance coverage.
buy-sell agreement fully funded with life insurance coverage.
2. Disability of a shareholder
While most buy-sells take into account death, many totally ignore what could be a more serious financial drain-disability. Often,
disability is poorly defined and not funded or under-funded. A disabled shareholder would expect his/her salary to continue, as well as a share of profits.
If the disability is extended, how long could the business keep paying? All of these decisions should be outlined in the agreement. It should be a business decision based on previously agreed-upon terms, not emotions.
disability is poorly defined and not funded or under-funded. A disabled shareholder would expect his/her salary to continue, as well as a share of profits.
If the disability is extended, how long could the business keep paying? All of these decisions should be outlined in the agreement. It should be a business decision based on previously agreed-upon terms, not emotions.
3. Departure of a shareholder
When a shareholder leaves, whether for regular retirement or early voluntary retirement, his or her stock should be purchased.
The purchase price can be the same as or less than the death price (it cannot be more). A lower purchase price might be set for early termination. As for retirement planning, a life insurance policy can provide the death benefit and also be used as a retirement supplement.
The purchase price can be the same as or less than the death price (it cannot be more). A lower purchase price might be set for early termination. As for retirement planning, a life insurance policy can provide the death benefit and also be used as a retirement supplement.
4. Divorce of a shareholder
It‘s not unusual for a spouse to end up with halfthe stock of a closely-held business in event of a divorce. There should be a provision in the buy-sell to force the spouse to sell stock back to either the:
(a) corporation;
(b) original shareholder;
or (c) other shareholders.
Again, the price cannot be higher than the death price.
(a) corporation;
(b) original shareholder;
or (c) other shareholders.
Again, the price cannot be higher than the death price.
5. Deadlock
If equal owners come to a major disagreement, the business can become "deadlocked,” unable to further conduct normal operations. In this case, the business may have to be liquidated. This should be taken into consideration in the buy-sell agreement.
6. Disagreement among owners
If ownership is unequal and there is a major disagreement, a minority shareholder could be forced out of active employment.
In that case, it would probably make sense to purchase his or her interest. This possibility should be taken care of in the agreement.
In that case, it would probably make sense to purchase his or her interest. This possibility should be taken care of in the agreement.
7. Default
In most closely-held corporations, the individual shareholders must personally guarantee corporate loans from banks and/or contribute payments to the bank or business. In the buy-sell agreement, there should be a provision whereby if a shareholder defaults, a buyout is triggered for his or her interest.
8. Determination of value
The most important item in a buy-sell is the valuation of stock or business interest. No one wants to over-pay for a business interest. In addition, each owner wants to be sure he or she (or his or her family) receives fair value in the event of a living buyout or death. Appraisals may be viable and even required if family members are involved. Proper valuation also fixes the value in
the deceased's estate for federal estate tax purposes. One stipulation is that the value must be fair market value at the time ofthe agreement. If appropriate life insurance is not purchased to fund the full value, then an installment purchase arrangement should be provided for the balance.
the deceased's estate for federal estate tax purposes. One stipulation is that the value must be fair market value at the time ofthe agreement. If appropriate life insurance is not purchased to fund the full value, then an installment purchase arrangement should be provided for the balance.
9. Bad Boy Events
Bad boy events can include attempted transfer of interest, termination of employment for cause, bankruptcy, competing with the
company, malfeasance and an attempted transfer of S corporation stock to an ineligible shareholder.
company, malfeasance and an attempted transfer of S corporation stock to an ineligible shareholder.
10. Types of buy-sell agreements
- Redemption-where the entity is the buyer
- Cross-purchase-where another owner or another person is the buyer
- Hybrid-mixes redemption and cross-purchase elements
- lmprovident redemption agreements can cause a shift of control of an entity
- Watch out for agreements that fail to provide tailored triggering events toaddress a situation where a junior generation owner predeceases a seniorgeneration owner