Plan For Continued Success
One of the chief concerns facing owners of family or closely held businesses is how to execute an orderly and affordable transfer of the business to the next generation or a key employee. Often times the need arises in order to support the owner’s retirement. Therefore, careful planning must transpire to answer various questions, such as;
Who is going to manage the business when you no longer do?
How will ownership be transferred?
Will your business carry on or will you sell it?
Succession planning seeks to manage these issues, setting up a smooth transition between you and the future owners of your business. Unfortunately, sometimes a business succession must occur due to unfortunate events, such as premature death or a long-term disability. In such cases, a buy-sell agreement is paramount for the orderly transition of that persons absence.
A contract is needed among the owners of a business to provide terms for their purchase of a withdrawing partner's or stockholder's interest in the enterprise. An owner, partner, or key person may relinquish control in the company for several reasons including death or disability. Therefore, the agreement establishes a predetermined business price and a buyer for the business interest. Two frequently used forms of buy-sell agreements are:
Cross Purchase - Surviving business owners purchase the deceased or disabled owner's share of the business from the estate or the owner for an agreed-upon price.
Entity Purchase - The business buys the deceased or disabled owner's interest (also known as a stock redemption plan). The deceased owner's estate or the disabled owner receives an agreed-upon price, with the remaining partners then owning all the business.