{"id":4434,"date":"2016-04-07T01:53:01","date_gmt":"2016-04-07T01:53:01","guid":{"rendered":"http:\/\/ericperkinslaw.raisonbrandsdev.com\/?p=4434"},"modified":"2016-04-20T14:58:23","modified_gmt":"2016-04-20T14:58:23","slug":"ten-things-business-owners-should-know-about-buy-sell-agreements","status":"publish","type":"post","link":"https:\/\/ericperkinslaw.com\/ten-things-business-owners-should-know-about-buy-sell-agreements\/","title":{"rendered":"Ten Things Business Owners Should Know About Buy-Sell Agreements"},"content":{"rendered":"\n<style type=\"text\/css\" data-created_by=\"avia_inline_auto\" id=\"style-css-av-av_one_full-9497bbf8bff73ea4c6992cc17fa9ec36\">\n.flex_column.av-av_one_full-9497bbf8bff73ea4c6992cc17fa9ec36{\nborder-radius:0px 0px 0px 0px;\npadding:0px 0px 0px 0px;\n}\n<\/style>\n<div  class='flex_column av-av_one_full-9497bbf8bff73ea4c6992cc17fa9ec36 av_one_full  avia-builder-el-0  avia-builder-el-no-sibling  first flex_column_div av-zero-column-padding  '     ><section  class='av_textblock_section av-av_textblock-0366cc7376be6c9e82a3e9cc8987b64f '   itemscope=\"itemscope\" itemtype=\"https:\/\/schema.org\/BlogPosting\" itemprop=\"blogPost\" ><div class='avia_textblock'  itemprop=\"text\" ><div class=\"entry-header clearfix\"><\/div>\n<div class=\"entry-content clearfix\">\n<p>1.\u00a0 <strong>The Sad Reality.<\/strong> <b>\u00a0<\/b>Statistics suggest that less than half of all business owners plan ahead for critical events in the life cycle of their business (e.g., disputes among owners, death or disability of an owner, and purchase offers from third parties, to name a few).\u00a0 A buy-sell agreement is a contract among a company and its owners that provides an opportunity to plan ahead, promote continuity among ownership, and accomplish other important goals.<\/p>\n<p>2.\u00a0 <strong>Basic Types of Buy-Sell Agreements.<\/strong>\u00a0 As a general matter, there are three basic types of buy-sell mechanisms:<\/p>\n<ol type=\"a\">\n<li>The Redemption Approach.\u00a0 A redemption agreement is a contract between each owner and the company in which the company agrees to buy back or redeem an owner\u2019s interest in the company under certain circumstances.<\/li>\n<li>The Cross-Purchase Approach.\u00a0 A cross-purchase agreement is a contract among the owners in which they each agree to purchase another owner\u2019s interest in the company under certain circumstances.<\/li>\n<li>The Hybrid Approach.\u00a0 This approach combines both redemption and cross-purchase features into the overall structure.<\/li>\n<\/ol>\n<p>3.\u00a0 <strong>Promoting Fairness and Harmony Among Owners.<\/strong>\u00a0 A buy-sell agreement can reduce the likelihood of owner disputes ending up in court.\u00a0 The typical business relationship has a life span of approximately seven years, so it is good business practice to plan ahead for mechanisms that will fairly and efficiently wind down a business relationship.\u00a0 Business owners should never underestimate the exorbitant economic cost of litigation, as well as the psychological and emotional toll of being involved in a lawsuit against business partners.\u00a0 The best time to identify and address buy-sell issues is during the early stage of a business relationship when everyone has an optimistic and cooperative attitude.<\/p>\n<p>4.\u00a0 <strong>Providing Liquidity.<\/strong>\u00a0 Ownership interests in a privately held company are illiquid securities.\u00a0 That is to say, there is no open market through which an owner can immediately sell his interest in the company.\u00a0 A buy-sell agreement, however, can create a market for what is otherwise an unmarketable asset.<\/p>\n<p>5.\u00a0 <strong>Promoting Smooth Transitions.<\/strong>\u00a0 A buy-sell agreement can serve as a road map for a fair and efficient ownership transfer via an agreed-upon price (or mechanism for establishing a price) and set of closing procedures.\u00a0 These mechanisms can promote the long-term success of the company by proving clarity and structure during what might otherwise be a tumultuous time for the company and its owners (such as upon the death of a shareholder or when the company terminates the employment of an executive\/shareholder).<\/p>\n<p>6.\u00a0 <strong>Playing a Significant Role in Estate Planning.<\/strong>\u00a0 A buy-sell agreement can reduce the financial burden on the heirs of a deceased business owner (e.g., estate taxes and other expenses) by providing for a mandatory purchase of the decedent\u2019s shares.\u00a0 This mechanism also serves to protect the surviving owners from suddenly being business partners with the decedent\u2019s spouse or other heirs.\u00a0 A buy-sell agreement may also serve as evidence of valuation of the business for estate and gift tax purposes.<\/p>\n<p>7.\u00a0 <strong>Solving Phantom Income Problems.<\/strong>\u00a0 Most buy-sell agreements involving pass-through entities\u2013such as \u201cS\u201d corporations, limited liability companies, and partnerships\u2013 include language providing a mechanism requiring the company to make distributions sufficient to cover the income tax obligations of the owners stemming from their allocable shares of company income.\u00a0 Without such a contractual arrangement, company owners could find themselves owing income tax on income they never actually received.\u00a0 This is often referred to as the phantom income dilemma.<\/p>\n<p>8.\u00a0 <strong>Preserving \u201cS\u201d Corporation Status.<\/strong>\u00a0 For companies organized and operated as \u201cS\u201d corporations, there are a variety of restrictions on ownership imposed by the Internal Revenue Code (e.g., limits on the number of shareholders, restrictions on who can own stock, and the \u201cone class of stock\u201d rule).\u00a0 A buy-sell agreement can include language restricting the shareholders from transferring their shares to an individual or entity that would be ineligible to own shares of an \u201cS\u201d corporation.\u00a0 The agreement can also set forth the mechanics for making certain elections available to \u201cS\u201d corporations and their shareholders with respect to income and loss allocations when a shareholder terminates his entire interest in the \u201cS\u201d corporation or the corporation ceases to be an \u201cS\u201d corporation.<\/p>\n<p>9.\u00a0 <strong>Understand the Attorney\u2019s Role.<\/strong>\u00a0 When utilizing the services of a business attorney for preparing a buy-sell agreement, be sure to understand who it is the attorney is representing\u2014the company, some or all of the owners, or both.\u00a0 It is not unusual for one attorney to jointly represent both the owners and the company, but while that may seem like a cost-effective approach, the owners should understand there are conflicts inherent with such dual representation.\u00a0 Ideally, each party to the agreement would have his own legal counsel representing his individual interests.<\/p>\n<p>10.\u00a0 <strong>Be Wary of Form Documents.<\/strong>\u00a0 An effective buy-sell agreement should be tailored to the specific objectives of the owners of the company.\u00a0 A \u201cfill-in-the-blank\u201d form printed off the Internet will generally prove to be of limited value in the long run.\u00a0 These agreements do not have to be complicated from a legal perspective, but they are vitally important from a business perspective and should be drafted with care.<\/p>\n<p>For additional information, please e-mail or call Eric Perkins at <a href=\"mailto:eric@ericperkinslaw.com\">eric@ericperkinslaw.com<\/a> or (804) 205-5162<\/p>\n<\/div>\n<\/div><\/section><\/div>\n","protected":false},"excerpt":{"rendered":"","protected":false},"author":5,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[34],"tags":[56],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/ericperkinslaw.com\/wp-json\/wp\/v2\/posts\/4434"}],"collection":[{"href":"https:\/\/ericperkinslaw.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/ericperkinslaw.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/ericperkinslaw.com\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/ericperkinslaw.com\/wp-json\/wp\/v2\/comments?post=4434"}],"version-history":[{"count":4,"href":"https:\/\/ericperkinslaw.com\/wp-json\/wp\/v2\/posts\/4434\/revisions"}],"predecessor-version":[{"id":4664,"href":"https:\/\/ericperkinslaw.com\/wp-json\/wp\/v2\/posts\/4434\/revisions\/4664"}],"wp:attachment":[{"href":"https:\/\/ericperkinslaw.com\/wp-json\/wp\/v2\/media?parent=4434"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/ericperkinslaw.com\/wp-json\/wp\/v2\/categories?post=4434"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/ericperkinslaw.com\/wp-json\/wp\/v2\/tags?post=4434"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}