As I wrote in my last post in this series, a business succession plan is a plan for how the transfer of ownership and management of a business will occur when an owner is no longer in charge. A succession plan is important to provide for a way for the business to continue to function even after an owner dies, becomes incapacitated, or just moves on to their next adventure. In my prior post, I wrote about basic considerations for business owners in succession planning for their business. This post discusses special considerations in succession planning for businesses with more than one owner. Other posts in this series will discuss succession planning for businesses with one owner and special considerations in succession planning for family businesses.
When a business has more than one owner, the co-owners will need to work together in developing a succession plan. They should discuss with one another what they want to happen to the business if one owner is no longer able – or willing – to participate in the business. Frequently, business owners who have worked together, sometimes for years, to build a successful business do not want to risk the value they have built in the business if one owner were to cash out to a third party, or pass their interest in the business along to a family member who may have little or no knowledge about or aptitude for the business. On the other hand, owners do want to be able to benefit from the value that they built in their business, or at least provide a mechanism for their heirs to receive a financial benefit.
Owners can commemorate the decisions that arise from their succession planning discussions in a Buy-Sell Agreement. A Buy-Sell Agreement sets forth the terms under which the business owners agree to purchase the ownership interest in the business from a departing owner or, correspondingly, to sell their ownership interest in the business to the remaining owners. A Buy-Sell Agreement might be in the form of a standalone document, or it can be incorporated into the terms of the Operating Agreement (for a LLC) or the Shareholder Agreement (for a S-Corp).
In developing a Buy-Sell Agreement, owners may want to consider how they want the transfer of their interest in the business to be handled. For example, do the owners want to require that the interest of the departing Member (for an LLC) or Shareholder (for a S-Corp) be purchased by the company, or would the remaining owners have the option to purchase the departing owner’s interest? What are the circumstances that would trigger the requirements to buy and sell an owner’s interest in the terms of the agreement? How will the company pay for the purchase of the ownership interest? Will payments be made over a period of time, or in a lump sum? Does the business (or do its Members or Shareholders) have sufficient cash on hand? If not, the owners may want to consider requiring the company to obtain a life insurance policy on the owners in order to finance the purchase of their ownership interest.
Effective Buy-Sell Agreements are specialized documents tailored to a business’s specific needs, priorities, and financial condition. Having a Buy-Sell Agreement that meets the needs of the business – and its owners – is an important part of having a business succession plan that benefits both the departing owner and for those remaining in the business. Ready to develop your business succession plan? We can help!