Consultant’s Corner: Business Succession Agreements

Q: What do I need to know about Business Succession Agreements?

Business succession planning refers to the planning for changing ownership of business interests. There is no one document that does effective business succession planning. You can research succession planning considerations through articles and information like the following examples, which explain that several coordinated documents are often required to ensure proper planning, including:

1. Wills and/or living trusts
2. Governance documents (articles of incorporation, articles of organization, bylaws, operating agreement, partnership agreement, etc.)
3. Buy-sell agreements.

According to FindLaw, 6 common business succession strategies are:

1. Selling your interest for cash or other assets
2. Transferring your interest using a buy-sell agreement
3. Granter Retained Annuity Trusts or Unitrusts
4. Selling ownership in exchange for a private annuity
5. Self-Canceling Installment Notes
6. Transferring the business through a family limited partnership

A buy-sell agreement may be called a “buyout agreement,” a “shareholders agreement,” an “owners agreement,” or a “redemption agreement,” and sometimes the terms of a buy-sell agreement are incorporated into partnership agreements, LLC operating agreements, bylaws, or other agreements. However, a buy-sell agreement is a legally binding contract that establishes under what conditions, to whom and at what price an owner partner or shareholder can or must sell his or her interest in a business. A typical buy-sell agreement allows the business entity itself or other business owners to purchase a departing owner’s business interest at a predetermined price or pursuant to a determined formula. This allows the business and the remaining owners to protect themselves from future adverse consequences, such as disruption of operations, entity dissolution or business liquidation, that might result if certain events, such as an owner’s sudden incapacity or death, should occur. This can also minimize the possibility that the business will fall into the hands of outsiders.