Golf and owning a business are a lot alike.
It takes hard work and dedicated practice to succeed. Those who reach higher levels usually have a trusted team supporting them. Of course, golf and business can provide ample frustration too! But learning and experience bring improvement. And along the way, increasingly advanced tools become part of the formula for success. One such tool for business owners is the buy-sell agreement. It dictates the terms and conditions of ownership changes caused by an owner death or any other reason. Think of a buy-sell agreement like a custom-fit lob wedge. It’s built just for you, conforming to your needs and desired results. While you won’t use it regularly, when you do need it, it fits and does the job. And like a trusty wedge, a buy-sell agreement is something you should have from the start.
Controlling variability
Golfers want to control the golf ball. Similarly, as a business owner, you want to be in control of any changes in ownership as much as possible.
A buy-sell agreement protects owners’ interests. That’s especially true if it’s created as a business begins and is readdressed every few years or any time there is a material change to the company.
Think of it like a business prenuptial agreement. Like the marriage equivalent, it may not ever be needed. But if it is, you’ll be glad it’s there.
Unfortunately, many business owners lack succession planning documents like buy-sell agreements. And when they do have them, the language is often outdated and irrelevant.
If you don’t have a buy-sell agreement in place, consider creating one. If you do, it’s probably a good time for a review to see if it still fits the needs of the business.
The players involved
Professional golfers have entire teams of people working toward the same goal. Just the same, business owners should have a team of professionals working for them when it comes to buy-sell agreements.
Here’s who you’ll need.
- Attorney — It should be someone who knows your business’s plans and is well-versed in drafting these documents. Every situation is unique, so an off-the-shelf agreement may not be the best fit.
- Accountant — Numerous tax implications arise when a business changes hands. Also, heir payouts, buyoffs and other taxable events could take place. So, an accountant is a must.
- Valuation expert — Obviously, the value of the business needs to be assessed. There are several ways to do it, so use a person with experience valuing firms comparable to yours.
- Financial planner/Insurance expert — If a business doesn’t have enough capital to fund a buy-sell agreement on its own, a funding mechanism must be put in place. A financial planner can analyze potential solutions to find the proper fit. It’s often life insurance, which means you’ll need a planner with life insurance expertise.
Ideally, all these experts are in the room together to help compose the agreement. That is one of the best ways to ensure it’s comprehensive, relevant and done efficiently.
What matters most
Two main considerations in buy-sell agreements are control over business succession and the funding behind the agreement. It’s important to envision how your business would look if any ownership interests changed hands.
Obviously, you wouldn’t want shares sold to a competitor. And like sand traps and three-putts, being in business with a surviving spouse is generally best avoided. Plus, consideration must also be given to owners’ different ideas on how to cash in on a potential sale.
A buy-sell agreement can help bring control to these variables. In addition to succession planning, the other important factor is the agreement’s funding.
If it’s with life insurance, some questions should be answered. Are your needs the same as when you bought the policy? Is there enough coverage? Should the policy be competitively shopped? Many times, a business will skyrocket, and the buy-sell agreement can no longer be funded using the measures in place.
The situation in a long-established business could be different. In that case, the firm could be carrying life insurance to fund a buysell agreement when it has enough assets on hand, rendering the insurance unnecessary. Why pay unneeded premiums?
Your buy-sell one-stop
Crafting or updating a buy-sell agreement for your business doesn’t have to be a drawn-out affair.
While getting all the players in the room could seem like a monumental task, take advantage of a firm that offers a onestop- shop for buy-sell agreements, with all the expertise under one roof.