Following are samples of common agreements and documents deployed as part of business succession planning. The benefits, tax considerations, and steps required to implement an appropriate strategy will vary greatly from one business to another. It is necessary for the business owner to consult with his own legal, accounting, and financial advisors to determine the most suitable structure that will meet their business’ specific planning requirements.
One of the first steps required to implement a business succession plan is to determine what the business is worth. While it may become necessary to obtain a certified business appraisal, in many setting generally accepted accounting principles (GAAP) can be applied to determine at least an approximate value. For certain businesses we may be able to arrange for a customized informal business valuation. Once the value of a business has been agreed to, agreements can be drafted to address the many “what ifs” that can impact the small to medium sized privately owned firm.
Cross purchase buy-sell agreements are arrangements in which the owners of a business agree to purchase a departing owner’s interest following retirement, disability, or death. To insure adequate funding to execute the agreement, business owners often purchase life insurance policies on each other. This is a common structure for businesses with two owners. Click here to view a schematic of a typical cross purchase buy-sell arrangement.
Entity purchase buy-sell agreements are arrangements in which the owners of a business contract with their company to purchase their interest in the company upon retirement, separation of service, disability, or death. To insure adequate funding for the required purchase, the business acquires a life insurance policy on each of its owners. Entity purchase agreements are often used when there are three or more business owners. Click here to view a schematic of a typical entity purchase buy-sell arrangement.
One-way purchase agreements are often formed between the owners of a business and a non-owner, such as a key-employee or family member. The agreement becomes effective upon the owners’s retirement, disability, or death. To insure adequate funds are available to finance the ownership transfer, the non-owner often buys a life insurance policy on the owner. Click here to view a schematic of a typical one-way purchase buy-sell arrangement.