How can a Shareholder Agreement (also known as a buy/sell agreement) Aid You in Your Small Business Succession Planning?
While small business owners are often focused on such issues as profit and loss, cash flow, and delivering their products or services to consumers, it is equally important to consider succession planning to prevent the sudden demise of a small business due to a shareholder’s death or incapacity. As our San Diego business attorneys can attest, an important tool for avoiding this scenario is a shareholder or buy/sell agreement.
Benefits of a Buy/Sell or Shareholder Agreement
- It ensures an agreeable price for a shareholder’s interest in the business and eliminates the need for valuation upon death because the shareholder has already agreed to a price or how the price would be determined beforehand.
- It places restrictions on how shareholders may dispose or transfer their shares, and to whom, to prevent a situation for the small business owner where unknown third parties may purchase an interest in their company or even take over their company.
- It can greatly aid in allowing for timely settlement of the deceased’s shareholder’s estate.
- It can include contingencies for the transfer of shares in a variety of scenarios, including disability of a shareholder, bankruptcy, as well as the death of a shareholder.
- It can ensure continuity in the business for owners, employees, customers, and vendors.
Entity-Purchase Provisions in a Shareholder Agreement
One common type of provision which can be included in a buy-sell agreement is an entity purchase provision. Once this type of language is in place, the business purchases a single life insurance policy on each shareholder or partner and becomes both the policy owner and beneficiary. When a shareholder/owner dies, his or her share of the company will pass to the heirs of his or her estate. The business may then use the proceeds from the insurance policy to purchase the deceased shareholder’s interest from the estate, guaranteeing a buyer for the shares and preventing a situation where an unsuitable shareholder becomes involved with the company or even the demise of the company. The cost of each policy, as well as all costs associated with the policy, are generally deductible for the business.
The Bottom Line
While there are a variety of ways to structure your small business succession planning, it always requires sound preparation. Business owners seeking a smooth and equitable transition of their interests should seek a competent and experienced San Diego business law attorney to assist them in evaluating and managing their particular needs. Contact the business attorneys at Gehres Law Library to get started on planning the future of your small business or browse our website for more information.
Click on this link for a word from Forbes about buy/sell agreements: