July-August 2018

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34 PalletCentral • July-August 2018 ne important form of a business continuity tool is a buy-sell agreement. These agreements allow owners to know up front who can buy into the business and how the process will work, and it provides opportunities to talk about possible scenarios rather than forcing owners into expensive litigation down the road. Without a buy-sell agreement in place, business owners risk facing scenarios and situations that can disrupt their business and hurt its value. Let's start with a quick review of the seven most common holes in a typical buy-sell agreement. Hole 1: Ignores Threats to Business Continuity Most buy-sell agreements don't address the challenges that the business, surviving owners, and deceased owner's family will face after an owner exits. They only address the transfer of ownership upon an owner's death or permanent incapacitation. For example, if the surviving owner does not have enough assets to satisfy the personal guarantees previously made by the deceased owner, once that financing is pulled, the business may not be able to continue. Likewise, if you are the company's rainmaker or COO and no one is able to step into your roles, your business may be unable to survive. At best, a buy-sell agreement dealing with the transfer of ownership at death (and sometimes permanent incapacitation) only ensures that (a) the surviving owners own all of the company and (b) the deceased owner's estate receives fair value, in cash, for the transfer of ownership. It leaves other major issues unaddressed. Hole 2: Ignores Common Lifetime Exits Does the agreement cover an owner's lifetime exit? An owner's incapacitation, divorce, bankruptcy, termination of employment, or retirement, along with business disputes among owners, can trigger the need to transfer ownership and are more likely to occur than the death of an owner. Most buy-sells fail to consider these conditions. Hole 3: Neglects the Decedent's Family Most buy-sell agreements focus exclusively on the benefits they provide to the surviving owner rather than on providing for the needs of the decedent's family. Even if the deceased (or incapacitated) owner's family receives buy-sell proceeds for the full value of their loved one's business interest, that amount is rarely enough to support the family at the same level as did their loved one's lifetime income. The fundamental exit goal for every business owner (i.e., maintaining financial security after exiting the business) is rarely achieved from the proceeds received via a buy-sell agreement. The financial shortfall for the deceased owner's family is caused by the transfer of ownership (and with it the right to a continued stream of income from the business) and the loss of the deceased owner's compensation. Buy-sell agreements aren't designed to address these problems. In fact, they can cause more problems because the decedent's income rights end after the ownership transfer. The question that we ask and help you resolve is, "If you die, what will replace your income stream for your family?" There are many possible answers to this question that may involve restructuring your buy-sell agreement. Hole 4: Isn't Up to Task Many buy-sell agreements are too simplistic to manage the personal complexities of the individual owners who sign them and their relationships with each other. For example, companies with multiple owners often don't want to treat all owners similarly, or one owner subject to the agreement may be uninsurable. In family businesses, non-business considerations may affect the design of buy-sell agreements. O 7 Gaping Holes in Business Continuity Plans BUSINESS Business Blog by The Jacobs Team

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