1.Business Succession Planning is a critical element to the survival of closely-held businesses. It is estimated that fewer than one-third (1/3rd) of family-owned businesses survive through the second generation and less than ten percent (10%) through the third. One of the primary reasons for this is inadequate planning for the owner’s death or retirement.
2.One of the principal tools which is utilized in insuring the continuation of the closely-held business in the Shareholders Agreement, in the case, of a corporation, or the operating agreement, with buy-sell provisions, in the case of a limited liability company.
3.Why is the need for a buy-sell agreement as an integral part of a succession plan so obvious? A buy-sell agreement, if it is openly and intelligently negotiated provides a framework for determining the manner in which an ownership interest in a closely held business is transferred to family members or co-owners in the event of a triggering event. If there is a “buy-in” by all interested parties, then it will minimize any wrangling or arm twisting upon the occurrence of a “triggering event.” “Triggering Events” can include death, disability, retirement or termination of employment of an owner or a proposed voluntary or involuntary transfer of an ownership interest.
1.Once the parties to the buy-sell agreement agree that some form of buy-out of an owner’s interest is required, the most difficult issue which they face is determining the purchase price for the owner’s shares.
2.Business owners, especially in family-owned business settings have in the past attempted to use buy-sell agreements as a means of transferring a controlling interest in the business to younger family members by establishing an arbitrarily low buy-out price upon the death of the senior family member.
3.Historically, the purchase price established by a Shareholders Agreement with respect to the purchase of shares from a deceased Shareholder’s estate established the market value for Federal Estate Tax purposes if certain conditions were met.
Scca/99999.008/Doc#82/Speech for Lake County Estate Planning Council