One day you will leave your real estate business. This event will result from your death, disability, retirement, or sale. Business Continuation Planning is all about control and maximizing the financial value of your business. Without proper advance planning someone other than you will control the process. Lack of planning can cause many problems. These problems include, but are not limited to:
- Inability to sell business.
- Overpayment of taxes.
- Loss of employment for employees and affiliated agents.
- Financial loss for you and your heirs.
- Reduced income to you.
- Increased legal costs.
- Interruption of business operations.
- IRS setting value of your business.
A properly drafted Buy/Sell Agreement is a critical component of advance Business Continuation Planning. The major elements of a Plan should clearly identify what will happen when you leave the business. While the document is drafted by an attorney, other important advisers in the planning process should include a CPA and Insurance Professional. A Buy/Sell turns uncertainty into certainty by spelling out:
- Who will buy the entire business or your percentage share.
- The price of your business interest or the formula to determine value.
- The triggering events such as death, disability, or retirement.
- The terms of payment and the mechanics of the ownership transfer process.
- Other important issues as determined by you and your advisers.
Buy/Sell Agreements are critical in protecting the value of your business interest, the financial well-being of your heirs, employees, and affiliated agents.
If co-owners are involved, the smooth business transition afforded by a properly drafted Buy/Sell Agreement goes a long way in helping retain client relationships. In addition, business partners and co-owners usually don’t want to be in business with a previously inexperienced and unaffiliated spouse or heir. For example, without a Buy/Sell Agreement your deceased partner’s spouse may have to be consulted on every business decision. That may not be something to look forward to.
The design of your Buy/Sell Agreement will depend on how your business is organized and the number of co-owners. Here are the most widely used designs and suggestions of when they might be appropriately used.
A One Way Buy/Sell Agreement
Typically used when there is only one owner or shareholder. When the Agreement is triggered, the business is sold to a key employee, affiliated agent, outside agent, or even a competitor.
Cross Purchase Agreement
Used when there are two owners or shareholders. One owner’s share is purchased by the remaining owner.
Entity Purchase Agreement
Used when there are three or more owners or shareholders and typically when the business is organized as a corporation. The corporation or “entity” purchases the percentage of ownership share. The percentage ownership share of the remaining owners increases proportionately.
“Wait and See” Buy/Sell Agreement
Flexibility is the keyword here. Used by companies that want the option to choose between a Cross Purchase or Entity Purchase design in the future.
Trusteed Buy/Sell Agreement
This design uses a trust to purchase the shares of ownership. Estate planning concerns can dictate the use of this design.
Life and Disability Insurance secures funding of Buy/Sell Agreements
O.K. your attorney has properly drafted the Agreement. All of the “t’s” have been crossed and all the “i’s” have been dotted. One large question remains: Where will the money come from to fund the Buy/Sell Agreement? To better understand the critical role that Life Insurance plays, take a look at this short video http://www.lifehappens.org/reallifestories/rizzotto
Saving or borrowing the money that is needed to fund a buy/sell agreement isn't feasible due to the uncertainty of death and disability. Saving and borrowing the money required would also place a financial burden on the remaining owners. The premiums for life and disability insurance can be planned and budgeted. Insurance turns uncertainty into certainty. Always seek an experienced and qualified attorney and insurance professional to help you plan and implement a buy/sell agreement.