| If you own a business, odds are the business | | | | Assuming buyers surface, what is the value of |
| represents a sizable portion of your estate. | | | | the deceased owner's interest? If the seller |
| Therefore, planning for the orderly | | | | is the deceased owner's family, they want as |
| disposition of the business is an important | | | | much as they can get. The remaining partners |
| planning consideration. | | | | want to pay as little as possible. |
| | | | Oftentimes, the dollar amount is far apart. |
| The most basic element of the plan involves | | | | |
| the use of a buy-sell agreement. It is | | | | By setting a price that everyone is happy |
| astounding how many business owners do not | | | | with while living, there is no haggling over |
| have a buy-sell agreement. Even more amazing | | | | price at death. In addition, this "pegs" the |
| is the numbers who have one, but have no | | | | value of the business for estate tax |
| method to fund it. Let's take a look at the | | | | purposes. In the absence of an agreement, the |
| rationale behind a funded buy-sell agreement. | | | | estate lists a value on the estate tax |
| | | | return, if one is required. The IRS often |
| Creates a Market | | | | comes back with their valuation opinion: a |
| | | | much higher amount. What ensues is a back and |
| Most businesses are closely held. A person | | | | forth argument, involving attorney's fees and |
| can't call their stockbroker and buy shares | | | | stress. Some of these cases have dragged on |
| in the business. Essentially, there is no | | | | for as much as ten years. |
| market for the business. | | | | |
| | | | Converts an Illiquid Asset to Cash |
| If the business is a sole proprietorship or | | | | |
| one-man or one-woman corporation, who is | | | | A properly funded buy-sell agreement |
| going to buy the business when the owner | | | | instantly converts bricks, mortar and steel |
| dies? In rare cases, a family member may be | | | | into cash. This provides funds for the heirs |
| able to step in and successfully continue the | | | | to pay obligations and taxes. Cash can be |
| business. Most of the time, the businesses | | | | invested to generate an income; cash is |
| simply closes its doors. | | | | easily divided among heirs. |
| | | | |
| If the business owner is a partner or | | | | Funded With Life Insurance |
| minority shareholder in a corporation, where | | | | |
| is the financial motivation for the other | | | | Assuming that a buy-sell agreement has been |
| owners to buy a minority interest? A buy-sell | | | | drafted, the next question becomes, "Where |
| agreement among the person's partners, or one | | | | will the funds come from for the obligation |
| involving one or more key employees for the | | | | now mandated by the buy-sell agreement?" |
| sole owner, creates a market for the | | | | There are three typical choices. |
| business. | | | | |
| | | | 1. Pay cash. This is only an academic choice. |
| Avoids a New Partnership With the Heirs | | | | Most businesses don't have cash in these |
| | | | amounts laying around. |
| In my experience, there is no quicker way to | | | | |
| get a male business owner's attention with | | | | 2. Buy out over time. If the business |
| respect to business succession planning than | | | | interest is worth $500,000, the arrangement |
| to ask two questions. | | | | is to pay, for example, $50,000 plus interest |
| | | | over 10 years. Negotiations could be tough. |
| "Do you and your partner have a buy-sell | | | | The family wants their money as quickly as |
| agreement?" | | | | possible; the remaining owners want to string |
| | | | it out for as long as possible. |
| "No." | | | | |
| | | | This option is expensive. It requires the |
| "If your partner died, would you like to be | | | | survivors to pay principal plus interest. The |
| in business with his wife?" | | | | payments put a mortgage on future earnings |
| | | | and have to go through the tax wringer. The |
| Silence. | | | | result is paying much more than a dollar for |
| | | | each dollar of business interest purchased. |
| When a partner dies, and the dust settles, | | | | |
| generally one of two things happens. The wife | | | | 3. Fund the agreement with life insurance. |
| calls up her husband's partner and asks where | | | | This is the "discounted dollar" method. Money |
| her paycheck has been for the last month. The | | | | is available immediately to fund the |
| partner has to explain that her husband's | | | | agreement, and the total premiums on the |
| salary was a result of his active | | | | policy will come nowhere near the amount |
| participation in the business, not tied | | | | received. |
| simply to the fact that he owned stock in the | | | | |
| business. | | | | If you own a business and do not have a |
| | | | buy-sell agreement in effect, call your life |
| The second possibility is the wife, who has | | | | insurance agent, attorney and accountant. Set |
| no experience or participation in the | | | | up a meeting, come up with a value, have an |
| business, takes over her husband's position. | | | | agreement drafted, and fund it with life |
| | | | insurance. You have probably spent a lifetime |
| A buy-sell agreement avoids both of these | | | | putting your business together. Now allocate |
| scenarios. | | | | a couple of hours toward keeping it together |
| | | | for your heirs and circumventing a myriad of |
| Sets the Price | | | | problems. |
| | | | |