Beyond the Buy-Sell Agreement
As a successful business owner, you're probably aware of the value of having a Buy-Sell Agreement in place. It's a crucial document that outlines the future course of your business under a variety of circumstances. However, it's important to understand that a Buy-Sell Agreement is not the be-all and end-all solution for business continuity and exit planning. Indeed, if not properly addressed and frequently reviewed, the agreement could potentially create more challenges than it solves.
Why a Buy-Sell Agreement Isn't Everything
Business owners often view their Buy-Sell Agreement as a blanket solution for business continuity issues. It might feel like a relief to have this document in hand, as it seemingly provides a roadmap for your business's future without your presence. However, an average Buy-Sell Agreement can have several gaps that need addressing over time, and it shouldn't be seen as a "quick fix" to business continuity.
Key Factors to Consider in a Buy-Sell Agreement
An effective Buy-Sell Agreement should be:
- Current and Updated: Business circumstances and owners desires can change over time. Therefore, it’s crucial to review and update these agreements regularly to reflect the business and owners realistic goals and resources.
- Proper Business Value Estimation: Many Buy-Sell Agreements falter due to a simplistic valuation methodology that doesn’t account for business growth or other complexities. Involving a third-party appraiser to determine the business value can help ensure a more objective and accurate valuation.
- Designed to Protect the Business and Family: The agreement should provide protection for the business and all owners, including provisions for sudden death or incapacitation. It’s also critical to ensure the financial security of the owners family.
Addressing the Gaps in Buy-Sell Agreements
First, the Buy-Sell Agreement should cover a range of potential events, such as the owners death, disability, divorce, retirement, quitting, addiction, or bankruptcy. It should also contain specific instructions on how future buyouts will be calculated and funded.
Secondly, while Buy-Sell Agreements typically focus on the benefits to the surviving owner, they must also consider the needs of the decedents family. If you, as the owner, die, what will replace your income stream for your family? Therefore, the agreement should include clauses to ensure continued income streams and ownership for the deceased owners family.
Lastly, the Buy-Sell Agreement should map out how each particular type of buyout would be funded. For instance, if a life insurance policy is funding a buyout of a deceased owner, is it a sufficient amount? Is the policy owned by the proper party, and are the beneficiary designations correct? In all buyout situations, the Agreement should aim to minimize taxes.
The Bigger Picture in Exit Planning
Despite its importance, a Buy-Sell Agreement is just one component of a comprehensive exit planning strategy. Even the most current, well-thought-out agreement is not a panacea for business continuity. To truly prepare for a smooth transition and protect the business and its stakeholders, business owners need to work closely with their advisors to:
- Review and update the Buy-Sell Agreement annually to reflect any changes in business variables.
- Ensure an accurate and realistic business valuation by involving a third-party appraiser.
- Strategize ways to increase business value based on the gaps identified by the valuation and desired exit goals.
- Develop measures to secure the family’s financial future.
By understanding and implementing these strategies, business owners can go beyond a Buy-Sell Agreement, enabling a comprehensive and effective exit planning process that ensures business continuity and protects all parties involved.
Ascent Wealth Strategies provides strategies for financial/estate and/or tax planning. These strategies do not constitute tax or legal advise. Consult legal or tax professionals for specific information regarding your individual situation.
Clear Creek Financial Management, LLC dba Ascent Wealth Strategies is a Registered Investment Advisor. This case study is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Clear Creek Financial Management, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Clear Creek Financial Management, LLC unless a service agreement is in place.