One estate-planning tool that can protect your family and the partners in your dealership is a buy-sell agreement. This legal document may give owners the first shot at buying an interest in the company if another owner pulls out, becomes disabled or dies. Ideally, these contracts are drawn up when a business is launched, or acquired from other owners, but they can be entered into later.
Don’t wait too long. If you die or become disabled without an agreement, it may be difficult for your heirs to know how to handle important matters that could have a significant effect on the value, continuation or disposition of your business. In other situations, they may find it overwhelming without guidance. Even if you stay with the company for decades, the time to prevent disputes is before they occur. Minimize legal fees, as well as sleepless nights, by solving the “what if?” issues now.
Print out and answer these questions to determine where you need assistance from your estate-planning advisor and your attorney to prevent future problems:
| Yes | No | N/A |
APPLICABILITY |
| Should the agreement apply only to the current owners or should it be binding on all owners throughout the life of the business entity? Notes: |
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| Should the agreement supersede all other agreements to redeem a business interest? Notes: |
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| Is the agreement reviewed annually? (Changes in price or terms should require a unanimous vote of the owners.) Notes: |
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| Yes | No | N/A |
TYPE of AGREEMENT |
| Should the agreement be structured as a redemption or cross-purchase agreement? Notes: |
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| Should the agreement be structured to require the seller to sell and the buyer to buy? Or should it give the buyer an option to require the seller to sell? What about giving a right of first refusal to the buyer? Or a combination of these options? Notes: |
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| Should the death of an owner cause an automatic buyout of the owner’s interest? Or should his or her family be allowed to remain as an owner? Notes: |
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| Yes | No | N/A |
PRICE and EVENT |
| Should the buyout price from the estate or heirs of a deceased owner be addressed? What about the buyout price to a disabled owner? An owner who resigns or is dismissed? An owner who goes bankrupt? If yes, when should it be paid? What interest rate should the obligation bear? Notes: |
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| Should there be a difference in price if there’s an amiable parting of ways? Notes: |
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| Should the price reflect the fact that you’re selling to a long time business associate rather than an outsider? Notes: |
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| Have you addressed the issue of “blue sky” and how to value it? This intangible asset involves goodwill, or the value of your dealership based on its established name, reputation, customer loyalty, and other factors. Notes: |
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| Yes | No | N/A |
FUNDING |
| Should the agreement provide that a buyout be funded by life insurance or some other investment vehicle? Notes: |
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| If funded with life insurance, should the type of life insurance used be addressed (for example, term life, ordinary life, last-to-die, paid-up life, universal life or an endowment policy?) Should a life insurance trust be used? Notes: |
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| Should all of the life insurance policy proceeds be used to redeem the interest? Can part of the proceeds be used to help the entity recover from the loss of the owner? Notes: |
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| Should whole life insurance policies with cash values be transferred to the owner at termination or retirement? Notes: |
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| Yes | No | N/A |
SECURITY |
| Should the agreement be guaranteed or secured? Notes: |
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| If so, should the security be in the form of a pledge of business assets? A personal guarantee by the other owners? An agreement obligating the entity to refrain from increasing salaries, paying dividends or making loans until all outstanding liabilities to the beneficiaries are paid? Notes: |
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| Yes | No | N/A |
LOANS |
| Should you address the disposition of owners’ loans (receivables or payables) in the event of death or disability? Notes: |
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| Should you address the disposition of owners’ loans in the event of termination other than death or disability? Notes: |
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| Yes | No | N/A |
COVENANT NOT TO COMPETE/ OTHER CONSIDERATIONS |
| Is there a covenant not to compete? Does it address geographic and time limitations? Notes: |
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| Should owners have the right to transfer or assign to a trust, for estate tax planning purposes, their rights and interests in the business? Notes: |
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| Should spouses of the owners sign the buy-sell agreement? Notes: |
Please contact Keith Laudenberger via our online contact form for more information.
Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.
