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Just in Case
I hope your first quarter went well. We have been very busy.
Recently,
I was selected to the National Republican Congressional Committee Business
Advisory Council. I will be advising the Republican congressional
leadership on how to improve the business climate and opportunities for
small to medium size businesses and enhance their global competitive
capability.
I look at
this role not so much from a political standpoint, but as a way to enhance America's
competitiveness. The world as New York Times columnist and best selling
author Thomas Friedman has written is getting flatter and we need to focus
on how America
can continue to compete.
Although we keep the names of our client's confidential, we
are pleased to provide descriptions of two clients each month that we are
working with and how we are assisting them.
- Representing the founder
of company with unique intellectual property in a battle over control
of the company
- Representing a defendant
in litigation where one of the issues is whether a father helping his
son out of trouble can serve as a defense in a fraudulent conveyance
action
Over the last month, managing partner, Robert Bovarnick,
presented his talk "20 Lethal
Legal Small
Business Land
Mines to Avoid" to the following groups:
- Technology Professionals
Networking Group
- Lehigh Pennsylvania Society of
Professional Engineers
WHAT IS A BUY-SELL AGREEMENT AND WHEN DO I NEED ONE?
A buy-sell agreement is simply an agreement between two or
more parties as to how something will be sold at a later date. It is very
common in the case of a closely held business where the owners are
concerned about what might happen if the owners reach an impasse with
respect to the business or where one of the owners dies. Does the interest
in the business go to the surviving relatives of the person who dies? Does
it go back to the business? How do the surviving owners make sure the
family of the deceased do not interfere with the ongoing operations? This
is addressed through something called a "buy-sell agreement."
There
are a number of types of buy-sell agreements. The most basic is where the
operating documents of the business (the by-laws of a sub chapter S
corporation or the operating agreement of and LLC) provide the terms under
which one owner can buy out the other. It is important that the method be
spelled out at the beginning of the business, rather than when you need to
make the decision to buy/sell. These types of agreements typically say that
the owners will agree on the value of the business. If they cannot, each
side will pick someone to provide a valuation. If the two valuations are
significantly different, then the two valuation professional pick a third,
independent person and that person's valuation is the amount used. Then one
party buy out the other. Sometimes if shareholder A selects the valuation
person, shareholder B gets to decide whether to buy or sell.
This
is the situation I had some time ago. My client was a partner in a firm.
When the firm was formed the partners entered into a very detailed
structure to buy out a partner. The firm became very successful and
profitable. My client was moving away from the area. So the partners were
able to use the structure to reach a buy out figure. Even with the detailed
structure in place, the process was difficult, primarily in dealing with
valuation issues. If the structure had not been in place the process would
have been very difficult and may have ended up in litigation.
In the
situation where one of the shareholders dies, there are two basic ways
insurance can be used to buy out the estate of the deceased shareholder.
The first is a "cross-purchase agreement", where each owner of
the business purchases an insurance policy on the other shareholders. The
purchaser is both the owner and beneficiary of the policy.
Upon
the death of a shareholder, the other shareholders are then able to use the
life insurance proceeds to purchase the deceased owner's shares. The second
type of buy-sell agreement is a stock redemption agreement, where the
corporation owns policies on the lives of the shareholders. When a
shareholder dies, the corporation buys the deceased shareholder's interest
in the company with the insurance proceeds. There are advantages and
disadvantages to each type of arrangement. If you are considering this, it
is important that you speak with your accountant to address the tax issues.
There
are also issues if one of the shareholders files for bankruptcy. If a
shareholder files for bankruptcy, under some circumstances, it is possible
that the bankruptcy trustee could force the business to be sold to pay off
the debts of the person who filed for bankruptcy. One way to avoid this is
to have the shareholders agree that the other shareholders will be notified
well in advance of a bankruptcy filing and go through the buy-sell process.
As you
can see, the first step is to set up an appointment with your lawyer and
accountant.
2007.
This publication is intended as a general guide only. This Client Alert does not
constitute legal advice of Bovarnick and Associates, a Pennsylvania
Professional Corporation, or any member of the firm with respect to the
subject matter hereof. The information presented and opinions expressed in
this Client Alert are intended for general guidance only. They are not
intended as recommendations for specific situations. As always, readers
should consult a qualified attorney for specific legal guidance.
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