Entrepreneurs invest heavily in preparing ideas and discussing ways that a new business can succeed. Good business co-owners and partners will invest significant time and money determining how they will interact with each other, make decisions and serve customers. However, seldom is a business’s end discussed when a business is started.
Many people believe that planning for a marriage’s end (by entering into a pre-nuptial agreement, for example) creates an expectation that the marriage will eventually fail. “Till death do us part” as an unyielding commitment works well for marriages because marriages are personal. In business, even “till death do us part” can causer problems because all businesses, including family businesses, have value and considerations that usually survive the death or departure of one or more co-owners of the business.
One of the most important tools to have to prepare for business ownership changes is a buy-sell agreement. When any of a business’s owners want or need to leave the business, what will happen? It is a shame when a business is forced to close (adversely affecting customers, employees and the community) when fewer than all of the business’s co-owners want or need to exit the business.
A buy-sell agreement is often effective if it answers four questions.
First, how is a change is ownership to be initiated? For instance, some business agreements limit the reasons that owners may leave the business so that the business does not lose the resources that help the business maintain a critical mass (the right assets for the size of business).
This is especially true for family farm businesses. In many family farm operations, the right amount of work, the appropriate quantity of acres and the sufficient size of machinery all must match each other. A major withdrawal of resources (to buy out an owner) can upset that balance and cause the entire operation to fail.
Second, is there discretion in whether a person is bought out, or do certain conditions automatically trigger a buyout? Some businesses empower the remaining business owners to determine whether the departing or deceased owner will be bought out. Other businesses empower surviving family members to determine whether the surviving family members remain in the business as silent partners or are paid and released from the business.
Third, how is a buyout to be structured? Sometimes, a business agreement will require that the person being bought out accept payments over time. Other times, assets other than money will be provided to compensate departing or deceased co-owners.
Fourth, how is a buyout price determined? Some business agreements will include discounts for “lack of marketability” and “lack of control” when determining the amount paid to a departing or deceased owner whose ownership constituted less than half of the business. Other businesses will have a price structure that adjusts to the circumstances that caused the buyout, such that a retirement buyout price may be more or less than the buyout price paid when a co-owner dies.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.