It’s important to understand that every Buy and Sell Agreement (BSA) is different and has a separate purpose when put together and implemented. Because of the vast differences in BSA’s, using a standard form of BSA rarely accomplishes the needs and wants of the parties involved.
Each participant in the agreement has different purposes and objectives and looks at the transactions very differently. Neither party knows when the agreement will actually be needed, and what the triggering event will be. A triggering event could be death, disability, divorce, termination, bankruptcy, and other defined events. One thing that can is consistent in most cases is that when a triggering event happens, then each party becomes visionless to the other parties’ best interests, and only focuses on their own and best interests.
The two participants in a BSA are a seller and a buyer. They come in different forms, as individuals, trusts, or estates. Usually their purposes and objectives are very different, and there usually is a conflict between the parties.
While creating the BSA the parties tend to be very fair before a triggering event. This is because everybody is in the same position and no one knows who will suffer the future triggering event. This is a positive viewpoint, as the parties are reasonable and objective about the possible and various scenarios. Everyone’s objectives are personal, and range from financial, tax, to personal protection for their families. Having a designed BSA can offer the owners some satisfaction that their needs are documented and witnessed.
Objectives of BSA
- To provide a predetermined roadmap for the business based on a triggering event which may call for the sale of a participant’s ownership interest.
- To provide a guaranteed buyer for the owner’s business interest and to create a market for that interest.
- If funded through life insurance or some other means, the BSA will provide liquidity for the payment of the business interest and help the estate pay for the estate taxes and other settlement costs of the deceased owner’s estate.
- Can avoid an impasse between the parties in the event of a triggering event.
- To protect the company and surviving shareholder from subsequent competition, should a terminated owner wish to sell to a 3rd
- To avoid potential conflicts between the surviving owners and the deceased owners’ heirs, by creating a roadmap through the agreement at the owner’s death.
- Can level the playing field for the estate or deceased owner’s as the agreement gives the deceased owner a say on how settlement of their interest will be to their heirs and estate. Especially, when the surviving family have little knowledge of the business entity.
- Establishing the price and method of valuing the interest, establishing the terms of payments, and providing a method of funding for the payment of that purchase price.
- Can create job stability for minority owners and key non-owner employees.
- Can establish the value of the entity for tax purposes.
- Can preclude owners from selling their interest without the consent of others thus avoiding the third-party ownership or voting percentages.
- The agreement can restrict ownership to people who are actively engaged with the entity of full-time basis.
- Can improve the credit worthiness of the entity.
- Can avoid transfer violations/Licensing requirements.
- Avoid transfers to individuals that would terminate the S corporation status.
- Can dictate discounts for lack of marketability (minority interest discounts).
- Can provide for voting agreements where necessary.
- Can dictate what happens to in force life insurance policies on the terminated or surviving owners.
These are only a few of the many reasons for a buy and sell agreement, and the advantages of funding the agreement.
The sale of your business to an insider requires the simultaneous presence of a capable insider purchaser coupled with your intention to exit. The reason is the “capable insider” who wishes to purchase your business is not interested in hanging around forever waiting for you to decide to sell. Without a solid commitment from you on the timing of your exit, prospective purchaser will ultimately become disinterested.
There is also the possibly of you having to finance part of the purchase price. Chances are that you will be helping finance part of the sale, which represents actual years after your exit, which you are tied to the company.
Using a two-tier system for the purchase of your interest!
Under a two-tier purchase system, a portion of your stock would be transferred to your inside buyer initially, and the balance would be transferred when the business is sold.
By using the two-tier purchasing system, there are a number of advantages:
- Providing stock ownership to a key employee today can provide incentives for better job performance.
- It can help reduce the risk that they will be attracted to a job offer from a competitor and ultimately leave you with your company secrets.
- Improves the likelihood of a bank financing the balance of their purchase in the future at your final exit.
- It gives them “skin in the game” when they contribute some of their funds to purchase some of the stock, giving them additional motivation to help the company be successful.
- Allows you to become a mentor to your key employee to further develop their skills under your watch, while still controlling the company.
Continue reading “Planning For The Tax Efficient Insider Sale!”
A major challenge for a small business owner is selling their business for the right price and to the right purchaser. However, in most cases we find that many business owners don’t spend the needed time to do this planning. Consequently, they jeopardize the potential sale price.
Many small businesses will not be purchased from an outside purchaser, (about 5%), but the sale could come from either family members or inside employees of the business.
A 2003 study suggested that owners felt nine out of ten family owned business leaders thought their business will continue to be run by the same family or families in the next five years. 
You may have considered keeping the ownership of the business in the family and may have already gifted stock or sold stock to your children. If this is the case, your planning should be more directed to other parts of the financial life, and possibly the role as a passive owner in the business.
Continue reading “LOOKING WITHIN FOR YOUR POTENTIAL SALE OF YOUR BUSINESS!”
Selling your business is an important financial transaction that requires a well developed exit strategy. Many owners view their business as much more than an asset. They’ve poured their hearts and souls into it. Maintaining the established business culture motivates them to sell to insiders. In fact, 95% of all sale transactions involve insiders, who may include co-owners, family members, managers and key employees. The insider group that is buying the business is called a key employee group (KEG).
There are four ways to transfer a business to insiders: Continue reading “Transferring A Business To Insiders”
One of the options a business owner has to exit their business is to use a Passive Ownership Method. This allows the business owner to stick around and be involved with the business, but to step away in the daily running of the business. When done correctly and with planning in advance the owner is fundamentally self-sustaining and does not have to head up the company. The owner is there to overlook the financial part of the company, much like a mentor. Key people are the self-sustaining element.
Divulge the culture values; sharing the same values as you, and what formed your foundation. By communicating with your employees what you did in all the areas of growing your business, they will feel a part of it and continue with the same traditions, habits, and ideas which became the business owner’s foundation of success. This will build a good foundation which will allow the business owner to delegate more of the tasks to others, allowing a self-sustaining company, with a growing management team. This is the framework that attracts investors to the company, knowing that the traditions and the culture can continue.
Improve cash flow; By increasing cash flow, you create options and markets to buy your business. For the outside investor, they see a cash flow that will continue without the owner, for the inside buyer, they have the cash flow to purchase the business owner out and complete the purchase of the business over time. For the passive owner, a good cash flow allows the business to sustain itself, as you enjoy the role of a passive owner; taking out a good salary, paying the key people good salaries, and enjoying life by being a passive owner. So, how do you create and improve cash flow. The best way is move cash flow up to the front of the line as a priority. Having cash flow meetings weekly with your management team will help you with the ideas you need to either increase cash flow through sales, or through expenses attrition. In any event by putting this topic in the front and getting feedback from your management team regularly, you will be able to come up with great ideas to increase cash flow and profits. Continue reading “Passive Ownership! My Cake And Eat It Too!”