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