A carefully crafted buy-sell is essential for smooth transition of ownership upon the occurrence of several key events, notes Anita Grossman of Sagemark Consulting, a division of Lincoln Financial Advisors, in the current issue of Family Business Magazine. These events include:
Death of a shareholder.
The business can suffer a financial setback (key person loss). This problem can be compounded if the surviving shareholders must take on the deceased owner’s spouse as a partner. Harmonious transition of the business can be accomplished with a buy-sell agreement that is fully funded with life insurance.
Disability of a shareholder.
While most buy-sells take an owner’s death into account, many ignore disability, which could be a more serious financial drain. Of course, the disability agreement should be fully funded.
Departure of a shareholder.
When a shareholder leaves, owing to a retirement or for other reasons, his or her interest in the business should be purchased.
Divorce of a shareholder.
There should be a provision in the buy-sell that requires the former spouse to sell stock back to the corporation, the original shareholder or the other shareholders.
Deadlock.
If equal owners have a major disagreement, the business may be unable to move forward or operate normally. A thorough buy-sell agreement would take this hypothetical circumstance into account.
Disagreement among minority and majority owners.
If there is a major disagreement among unequal owners, a minority shareholder could be forced out of active employment. In that case, it would also probably make sense to purchase his or her interest.
Default.
In most closely held corporations, the individual shareholders must personally guarantee corporate loans from banks or contribute payments to the bank or the business. There should be a provision stipulating that if a shareholder defaults, a buyout would be triggered for his or her interest.
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