Too often, the ‘unthinkable’ is really the ‘inevitable.’ Protect yourself now.
You’ve spent the last five years building your business. You put in the work, and now you’ve got a great service. You’ve acquired great clients. Your partner is the only person who knows your field inside and out as well as you do. You’ve got a great team in place so that you can focus on the higher-level aspects of running your business. Everything is going according to plan.
Until it doesn’t. Life happened, and now you’re without a partner. Who do you want to fill their shoes?
» Their spouse, whose primary interest in the business is whether the holiday party has an open bar?
» Their oldest child, who almost finished a semester’s worth of business classes?
» Your top employee, the one you and your partner have been grooming to advance in the company for the last three years?
The choice may be obvious, and yet we see a wealth of smart, savvy business owners who have taken the time to build a successful business, but haven’t taken the time to maintain the long-term health of their business. Why not?
The truth is, most people don’t want to have to squirm. Planning for the loss of a business partner means acknowledging that the worst can happen. But let’s face it, you wouldn’t have gotten where you are if you weren’t comfortable with a bit of discomfort. So, since life is going to happen, good and bad, decide to roll with it instead of getting rolled over.
Your Buy-Sell Agreement: A Map to Guide You Through the Wilderness
Simply put, a buy-sell is an agreement among the owners of the business about what to do if any of the owners faces one of the dreaded D’s: death, disability, divorce or dismissal, or any other event where an owner parts ways with the business, such as voluntary or involuntary resignation.
Let’s say you don’t lose your partner, but your partner has lost half his or her ownership interest after an unhappy divorce. Wouldn’t you rather that your partner have the option to repurchase that interest at fair value instead of taking on a newly disgruntled former spouse as an owner who would gladly gouge you if given a chance?
The Questions You’ll Have to Answer
Now here is where the planning comes in, and you will have to put some brain power into it.
Ownership and Control // Where does the ownership interest go when an owner leaves? Does it go to the other owners? Does it go back to the company? How much is each current owner entitled to buy? Is the buyback optional or mandatory? Most importantly, who has control?
Cost // How do you value the ownership interest? Valuation is a double-edged sword. If another owner leaves, you or the company want to gain back that interest. If you are the one to go, you want to make sure that you or your family is getting the fair value of what you worked so hard to create. The same applies to your ex-partner. Be fair or be generous, but choose a valuation method that is realistic for your company’s situation. If your company’s situation changes, consider changing the valuation method accordingly.
Funding // If the company is required to buy back the departing partner’s ownership interest, where does the money come from? If it is optional, how long do the buyers or the company have to make a down payment? How long do they have to pay the full amount? At what interest rate? Can insurance help?
Avoid DIY Buy-Sell Agreements
Downloading a document online and filling in the blanks won’t cut it here.
Here’s just a smattering of the things that are going to make one buy-sell different from the next: the number of owners, the number of companies affected, differences of health and age between owners, frequency of disputes among owners, marital and familial status of members, and, of course, the consideration we’d all like to ignore but can’t—taxes. A downloadable document may let you fill in the blanks, but is unlikely to explain much about how these variables affect each other.
For that, you want expertise. Find an attorney experienced in drafting buy-sell agreements for a business of your size.
Anyone can dream. Few can plan that dream into reality. Don’t neglect the piece of your business that you’ll have to face whether you like it or not. It’s time you protected your business with a buy-sell agreement.