By Founder & CEO Scott Savage.
Business ownership, especially starting a business, can be overwhelming. Over the years, we have seen business owners make two types of mistakes:
Errors of commission, or an incorrect decision, which include paying too much for real estate, hiring the wrong people, or buying the wrong inventory.
Errors of omission, or missed opportunities, which include not having a board of advisors, not hiring a tax expert to help with structuring the business, or not creating a buy-sell agreement.
Although mistakes are inevitable, it is possible to take steps to avoid errors of omission. This article explores how a buy-sell agreement works, why we strongly recommend one for our business owner clients who share company ownership, and how we can help with implementation.
What is a Buy-Sell Agreement?
“The beginning of wisdom is the definition of terms.” —Socrates
Stated simply, a buy-sell agreement is a legal document made between two or more shareholders of a privately held corporation or entity. The agreement helps the business streamline the transition between owners after a triggering event, such as death, disability, divorce, or disagreement.
The agreement works by establishing a valuation method for the business. There are various ways to determine the value of a business, including:
Fixed Price Approach: Setting a fixed price of the business, typically on an annual basis.
Formula Approach: Agreeing on a formula that utilizes components such as cash flow or assets to determine the price.
Finally, the buy-sell agreement will include a funding strategy. It can be funded or unfunded, but typically people will fund buy-sell arrangements with insurance, which is what we generally recommend.
Why Have a Buy-Sell Agreement?
A buy-sell agreement can greatly simplify a transition between business owners. Without an agreement in place, you can anticipate holdups, delays, and potentially, litigation in transferring ownership to the other shareholders. A buy-sell agreement aids in bypassing these issues, helping the business to move forward during times of change.
Some business owners think such an agreement is useful once their company gains in value, not at the outset. But we encourage anyone who is starting a company with someone else to get a buy-sell agreement in place. You never know what will happen, and this agreement can prevent a lot of trouble and heartache.
How SJS Can Help
Depending on the needs and company structure, we can help advise on the proper approach to a buy-sell agreement. We are able to coordinate the process with attorneys and tax professionals to help you create an agreement that is effective and valuable.
This is part of the ongoing service we provide and one that isn’t simply drafted and put on the shelf. Buy-sell agreements become part of a dynamic, ongoing conversation with our business owner clients. We can monitor the company’s growth and indicate if our client should fund or update the agreement given the company’s increase in value.
Schedule a complimentary discovery meeting today to discuss what’s on your mind and how we may be able to help.
Important Disclosure Information & Sources:
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice. This material has been prepared for informational purposes only.
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