33 Proprietorship Buy-Sell Agreements

33. Proprietorship Buy-Sell Agreements In a sole proprietorship, there are no surviving business associates to purchase the interest of the owner. If he wishes to sell, he must do so to relatives, employees, or outsiders interested in purchasing the business. A business may have key employees who have been with the business for a long time, are interested in it, and desire to purchase it after the death of the proprietor. A buy-sell agreement can be made with them funded by insurance on the owner's life. Some of the advantages of a buy-sell agreement with key employees are: The heirs of the proprietor are guaranteed a prompt sale at a fair price. The proprietor will leave a liquid estate. Funds will be available at the death of the owner to pay estate taxes and other debts of the estate avoiding a forced sale of the business. The morale and loyalty of the key employees who will become the eventual owners of the business will improve and they will be induced to work more productively. The heirs will obtain income from the insurance proceeds, instead of a business they might not be qualified to handle. The agreement may help peg the value of the estate for tax purposes. A Vital Consideration Your business is a source of security and profit for yourself and your family for a number of reasons-- ……your dollars………………..your skill ……your time…………………....your thought --your energy………………...your initiave As long as you are alive and can continue to devote your abilities to the success of your business, there is every reason to believe that it will continue to provide increasing profits for you. But unless you plan ahead, the odds are that your business will die when you die, with your family receiving only a fraction of its true value--or perhaps even finding it a liability to their financial security. This is not what you want for them, so let's consider what you do want. Liquidate or Sell the Business To get a reasonable price, you must provide the solution to certain roblems that will face your executor. Unless you give him the power in "direct, explicit and unequivocal language" to continue the business, he must close it down immediately. What he needs, of course, is time to minimize the liquidation losses, or time to avoid a forced sale. To provide for your family's future, you want to protect them from the financial burden of business debts and taxes which will revert to them if the business assets are not sufficient. They will need a substitute source of income so that they can maintain a standard of living similar to the one now provided by you through the business. Your Plan of Action Make a provision in your will which will allow your executor to carry on the business until it can be sold or liquidated for a reasonable price. Purchase enough business life insurance to provide the cash needed at your death to do these things-- --pay business debts and taxes --provide working capital until the business is sold or liquidated --provide a new source of income for your family Your business life insurance should also create a continuously increasing reserve fund for emergencies, provide additional credit and financial standing for the business and build a retirement fund for you. Pass the Business to Your Family To do this successfully you must provide the solution to certain problems that will face them when they take over. There must be sufficient cash to prevent forced liquidation of the business in order to pay debts and taxes. There must be sufficient cash to assure good management until they are fully prepared to take over. There must be sufficient cash for working capital to give them a good chance to continue your business' success. Your Plan of Action Make a provision in your will to continue the business so that it may be turned over to the family as a going concern. Purchase enough business life insurance to provide the cash needed at your death to do these things-- --pay all business debts, and taxes, eliminating the possibility that creditors will force liquidation. --provide cash for the additional working capital which will be needed to maintain your business credit standing, to retain key employees, and to hire efficient management if necessary. Your business life insurance should also create a continuously increasing reserve for emergencies, provide additional credit and financial standing for the business, and build a retirement fund for you. Sell the Business to One or More Employees To do this successfully you must provide the solution to certain problems that will face them and your heirs. There must be an agreed-upon fair price. There must be some arrangement for guaranteed payment to your family. The employees must be able to meet these payments so that they can take over immediately. Your Plan of Action Enter into a Business Continuation Agreement with the buying employees that will transfer your business to them immediately upon your death. The value of the business is initially established when the agreement is executed and then is revised periodically. The method of payment is established in the business continuation agreement. The employees purchase sufficient business insurance on the life of the owner to pay the cash portion of their commitments. This business life insurance will guarantee that your heirs will receive 100% of the value of your business. It will preserve the business as a going concern for the benefit of all your employees. It will strengthen the credit and good will of your business today. The Business Continuation Agreement When a business owner has an understanding with one or more of his employees that the business will pass on to them when he dies, it is just good business to put everything down on paper so that neither the owner's heirs nor the employees are surprised or disappointed at a later date. A business continuation agreement is drawn by an attorney and usually mentions-- --that the estate will sell the business to the employees. --that the employees will buy. --a method for establishing the selling price. (Usually set when agreement is drawn, and then periodically reviewed.) --a method of payment. (All cash, or cash plus annual notes, or monthly income.) --full release to the estate for liabilities of the business. --that the owner cannot sell the business while he is alive without first offering it to the employees included in the agreement. --the purchase of business insurance on the life of the owner by the employees so that they will have the cash to buy the business when they need it. --other provisions to protect both the owner and the employees. These may include mention of alternate means of paying premiums, premature death of the buyer, bankruptcy, or mutual desire to discontinue the agreement. Tax reference verification 1-800-829-1040 Back