LP Gas, May 2011

BUY SELL AGREEMENTS Learn more about buy sell agreements Continued from page 35 must be given to the other owners These agreements also often specify the methods by which internal disputes are resolved Some issues will lend themselves to arbitration or thirdparty mediation For those which can be resolved by voting the agreement will specify who has the power to vote and whether a simple majority or super majority is called for Buy sell agreements can be real lifesavers in sticky situations For example they can obviate unexpected shifts in power to unqualified individuals Often one member of the second generation receives share of ownership then gets divorced notes John J Scroggin a partner at the estate planning law firm of Scroggin Company in Roswell Ga That individuals former spouse now owns the equity Unreasonable demands can follow and that can be a thorn in the side of the family The solution Scroggin says is to draw up clauses in buy sell agreements that anticipate common and costly events such as divorce or unexpected death To do this the document should mandate a call right on shares that are gifted to children The call right is a provision that empowers remaining family members to buy out the shares of a non family spouse who might survive the divorce or death of a family member who was in an ownership position Pricing the business The buy sell agreement will usually specify the method for determining the business value upon the death or departure of an owner Commonly the plan may call for a valuation to be done by a business valuation expert or CPA Herman Giddens says There may also be a tiebreaker provision Survivors who disagree over the business value might be able to choose their own expert and then either those two experts agree on a third expert or the two values are averaged An alternative valuation system specifies a formula to be used such You want to learn as much as you can about buy sell agreements which are detailed plans that attempt to ensure the smooth transfer of businesses from one generation of owners to another Here are some useful resources The Small Business Administration SBA has published a comprehensive document on family business transition Go to www sba gov and search for Family Business then for Transferring Management in the Family Owned Business Northeastern Universitys Center for Family Business maintains a compendium of articles at www fambiz com Click on the Search button and enter Buy Sell Agreements Avoiding Mistakes in Buy Sell Agreements by John J Scroggin This white paper is available from the law firm of Scroggin Company in Roswell Ga Visit www scrogginlaw com as a multiple of earnings This can be problematic though since economic conditions at the time of a partners retirement or death might differ substantially from those at the time the plan is put together making a pre set formula inappropriate Avoiding problems Successful buy sell agreements include provisions that anticipate and obviate common problems Here are some tips from Scroggin who has studied the hidden pitfalls of family business transitions Non compete agreements Suppose one family member desires to exit the business but desires some compensation in return The buy sell agreement might include a clause that specifies the value the individual will be paid for his or her shares That sounds fine on the surface but it can backfire if the individual then goes out and starts a business pursuing the same customers If an individual is paid a lot of money for their share of the business but nothing stops the person from competing for the very business that was purchased why should the amount paid be any more than the value of the hard assets Scroggin poses The way to avoid this pitfall Scroggin says is to include a non compete provision that prohibits the departing family member from engaging in a similar business for a set period of time The agreement can also specify that the departing owner may not solicit the organizations current customers or vendors or utilize any of its trade secrets Tax implications Never provide for a business transition without having a tax expert review the documents and the plan Scroggin says Proper planning can substantially reduce the tax cost of the transaction In many cases for example the sale of the business to family members can create substantially more taxes than a gift Funding Its important to set up vehicles for funding the buyout Life insurance often provides funds for buying the shares of an owner who has died And if the owner is retiring there can be provisions for installment payments over time Exit strategy Suppose one child wants to leave the business after some time passes How much will that individual be paid for his or her shares This should be spelled out in a legal document that you can think of as a kind of pre nuptial for business owners 36 LPGas May 2011 www LPGasmagazine com