The death of a partner or major stockholder in a business can have devastating effects on both the business and the deceased partner’s surviving family. The business is concerned with gaining control of the deceased partner’s interest at a fair price so that it can continue operations without interference from the surviving family members. The family members are most concerned with receiving as much money as possible for their interest in the business and for capital that may be needed for estate settlement purposes. To make this process as clear and expedient as possible, it is important to work with an experienced financial advisor or attorney and ensure that there is a business succession plan in place.
Types of Business Owner Buy-Sell Arrangements
Entity Plan: Under this arrangement, used when there are multiple owners, each of the business owners has a separate agreement with the corporation or partnership as the entity. The entity, per the buy-sell agreement, will buy the deceased partner’s interest at his or her death.
Cross-Purchase Agreement: Used in situations where there are two or three owners, a cross-purchase agreement is established between each of the owners. At the death of one of the owners, the surviving owners agree to buy a proportionate share of the deceased owner’s interest.
Buy-sell arrangements are a simple, yet effective way for business owners of privately held companies to plan for the orderly transfer of business interests where two or more owners are actively involved in the business. In addition to securing the needs of the surviving family members and ensuring the continuation of the business, a buy-sell arrangement also ensures each owner that there is a buyer for their business interest at a fair price.
Business succession planning involves legal, tax, and personal financial issues. Guidance from a qualified attorney or tax professional is strongly recommended.
For more information on business succession planning, contact James today.