Business Succession Planning

Buy-Sell Planning

Your Business Needs a Corporate Contingency Plan

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Offering a full BUY/SELL Course

Above all, the goal of Buy-Sell Planning is certainty. You have the ability to prescribe the rights and obligations of the owner(s) of a business as well as the terms upon which the ownership interests may pass. Uncertainty can lead to impasse, litigation, lack of leverage in negotiation, and lost enterprise value.

You may create a separate Buy-Sell Agreement (“BSA”), or you may insert Buy-Sell Planning provisions into broader shareholder agreements, operating agreements, partnership and joint venture agreements, and bylaws.

Your circumstances will dictate which is the best path for you to take. Aside from certainty, reasons for a BSA include:

Business Succession Planning

Restricting certain transfers

The entrepreneurial venture is usually a small business enterprise as well as a privately held entity. Consequently, restrictions on transfer are often necessary to protect the company and your objectives. For example, a transfer could be prohibited and declared void in all respects if it is made to a transferee that: a) would violate an entity’s existing S corporation election, b) is not your descendant, or c) is not consented to by a stated voting percentage, including unanimous. This type of provision ensures the ownership interests never end up in the wrong hands, as defined by you.

Creating a Class of “Permitted Transferees”

While restrictions may be necessary, it may also be desirable to create a class of potential transferees who may receive ownership interests without any prohibitions. Generally, this class of “permitted transferees” may include existing owners, your descendants, an estate planning trust for your benefit, any entity controlled by you, and perhaps key employees.

Clarifying the appropriate “trigger events"

At the core of the BSA are the various trigger events upon which the buy-sell provisions take effect. Most commonly, the BSA will deal with the contingency of the current owner’s death. The BSA creates a binding obligation for the estate of the deceased owner to sell, and the prospective purchaser to buy, the ownership interests of the deceased owner.

And while planning for death is the most common driver to the BSA, there are a variety of triggers of equal, if not even greater, importance.

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They include:
  • Disability
  • Voluntary transfer
  • Involuntary transfer
  • Retirement
  • Resignation (before a specified retirement age)
  • Attainment of stated return or economic threshold
  • Divorce
  • Bankruptcy
  • Loss of professional license
  • Termination
  • Dispute
  • Passage of a stated period of time
  • Conviction of a crime
  • And anything else that fits your circumstance

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Business Owners - The Bulk of Your Estate

Since the business typically comprises the bulk of the entrepreneur’s estate, and is the asset that impacts the most people, the entrepreneur must plan with extra care in determining the optimal succession structure.
1) Corporate Contingency Plan
Very few companies create a formal corporate contingency plan, but all companies would benefit from having one. The point to the contingency plan is to establish who has authority and what steps should be taken in the event that certain key employees or owners are no longer available or able to act in their respective capacities. Whether due to death, disability, or otherwise, an individual may suddenly not be able to perform his or her duties for the enterprise. If this is the entrepreneur, then the impact is of course most devastating. To ensure that the business has the least adverse impact, the entrepreneur should clearly lay out in a formal written document exactly what happens and who steps in with authority upon any such contingency. This contingency plan should be approved in the minutes and inserted into the corporate record book to ensure its enforcement. Since each business and its ?personnel are unique, each contingency plan is similarly unique and should be crafted to address the unique facts.
An oversight of many entrepreneurial businesses is the failure to have, at a minimum, unanimous written consent minutes approving the actions for the year and appointing Directors, Officers, Managers, etc. And for those that do create minutes, they only apply the statements to the current individuals for the current year. A good set of comprehensive annual minutes can also be used to set forth the key successors to the positions of authority for avoidance of doubt. For example, after the resolution appointing an individual as Director, it can also appoint the successor director for such individual in the event of death, disability, etc. This ensures a seamless transition without dispute. Moreover, these minutes are revisited every year, so the best- suited successor can be changed as the appropriate individuals change. The minutes are thereafter placed into the corporate record book.
Powers of Attorney for Property and Health Care are routinely used in estate planning, but the entrepreneur may need something more – a Limited Power of Attorney for Business Decisions. This is a specific power of attorney that grants an individual authority with respect to the voting or control of a particular business in the event of the entrepreneur’s disability. This ensures that the most suitable business-minded individual steps into the entrepreneur’s shoes so that the business is run as intended by the entrepreneur. Oftentimes, the individual selected as an agent for the basic power of attorney for property (usually a spouse) is not the best candidate to step up and control the business or its shares.
As discussed in the first installment of the Taming the B.E.A.S.T. series, the entrepreneur should have a fully documented shareholder agreement with buy-sell provisions. This agreement provides for the clear succession, pricing and buyout terms for the interests; in addition, the shareholder agreement can provide for voting controls, management succession, and other contingencies. The more comprehensive the shareholder agreement, the greater the certainty upon a given succession contingency.

Are You Wondering if Your Business is Set Up Properly

An absence of thoughtful buy-sell planning can lead to loss of value, litigation, and failed transition for your business interests upon a wide range of trigger events.

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