Buy-Sell Agreement - What will really happen?

~Paul Weisinger, CPA/ABV, CVA

Do you know how your buy-sell agreement will really work when needed?    Have you had a "mock crisis" performed? What is a mock crisis? A mock crisis occurs when we calculate how much cash and ownership will transfer according to the current legal agreements in place (if any exist).  If you answered "yes" to those questions, congratulations!  If the answer is "no", now is the time to take proactive action to correct a potentially grave oversight.

I am frequently asked to prepare a valuation for a business owner that may have died, became disabled, retired, declared bankruptcy, became involved in a divorce and so on. These events are called “triggering events.”  They initiate the terms of the buy-sell agreement. The buy-sell agreement governs the process of calculating the amount of money that will exchange hands. After performing a valuation for these purposes, there are times when the spouse of the recently deceased owner, the disabled owner, or existing owner now running the company declares: "That's NOT my understanding or the intent when we designed the buy-sell agreement!"  Now we have added further emotion to an already emotional and complex situation.  We have a disconnect between the spouse/owner's expectations and the current governing agreements.

One of the most important factors to the buy-sell agreement is the price of the ownership interest - not to mention if the transaction is the most tax efficient for the parties.  Many business owners have not had a "mock crisis" to see how much cash their spouse and heirs will receive or how much they will need to pay out - assuming no funding mechanism is in place.   The most prudent decision a business owner can make is to make sure when a critical event occurs, he/she knows exactly how the process will work out.

Many business owners ignore the necessity of a buy-sell agreement or will not put the diligence into properly preparing one.  In my article, "Buy-Sell Agreement: What is it? Why do I need it?" I explained the ramifications of not preparing a buy-sell agreement.  Every business owner will transition the business.  We would be happy to help you plan the best course of action for you and your business.  

Join our Sept. 27th Seminar, "Buy-Sell Agreements: What You Really Need to Know."

For more information call us at 216-573-2330 and/ or email me at p.weisinger@walthall.com