Jerry J. Goldstein

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Creating a Business Succession Plan With Buy-Sell Provisions

On Behalf of | Jan 5, 2022 | Firm News

You’re running a successful business but nearing retirement age. You’ve yet to figure out what to do with the business when that day comes. Sell it, turn it over to a family member, or groom an employee to run things?

Sometimes, people get so caught up in just making their business function and making ends meet that they neglect to look ahead to the day when age or other circumstances force you to move on.

Business succession planning should be part of any estate plan, along with a living trust, pour-over will, and other legal instruments. It may be tough to think of parting with your business or watching someone else run or even own it, but the day will invariably arrive, so plan ahead.

If you are a business owner or partner in a business, contact the Law Offices of Jerry J Goldstein to help you put in place a solid estate plan that includes provisions for business succession. We can meet, assess your situation, and make sure every detail is taken care of for a seamless business succession.

We proudly serve clients throughout the Coachella Valley including Palm Desert, California, as well as communities in and around Imperial, Los Angeles, Orange, Riverside, San Bernardino, and San Diego counties, among others.

Why Is a Business Succession Plan Important?

There are several reasons to plan ahead for your business, whether you are the sole owner, a partner in a partnership, shareholder in a corporation or member of a limited liability company. One reason is to prevent disarray should something unforeseen happen to you.

You need to have one or more persons ready to step in to run the business. If success depends solely on you, there could be trouble if you become incapacitated or pass away. There may even be a forced sale, which could potentially shortchange your heirs.

If you are in business with others, your sudden absence could leave a void, and without a proper buy-sell agreement in place, it could also leave you and your family, as well as your co-owners, if any, with an uncertain financial future.

Overall, a good succession plan should focus on:

  • Transferring ownership when the time comes

  • Maintaining your lifestyle in retirement

  • Providing for your heirs financially

  • Preparing the business for the unexpected or unforeseen

Sole Proprietor Succession Planning

If you own your business by yourself, you can train a family member or even a trusted employee on how to run things. When the time comes, you can simply pass the reins over to whomever you’ve prepared for the task.

To ensure the business passes to your heirs when you’re gone, you can name your family members as beneficiaries of your estate, including your business. Although this can be accomplished through a will, it is far preferable for both financial and timing reasons to adopt a living trust. A living trust, of course, has the benefit of avoiding probate court proceedings which is generally far more costly and definitely far less efficient.

You could also put in place a plan to sell the business when the time comes. If you have co-owners, you should have provisions to pass control to them upon your retirement, disability, or death. Conversely, the plan would also provide for your succession to their ownership interests should they retire, become disabled or die. If you are a sole proprietor, you could envision either selling it on the open market or selling it to an employee whom you have groomed for the job. This often requires giving someone a power of attorney to sell your business if you’re no longer around or able to do so yourself.

Partnership Succession Planning

If you’re in a partnership, the partnership agreement must be written to provide for the possibility of one partner either moving in another direction, becoming incapacitated, retiring, or dying prematurely. Generally, this is done through a buy-sell agreement or buy-sell provisions in the partnership agreement.

Buy-sell agreements often rely on purchasing life insurance on all the partners. There are two applications of life insurance in a buy-sell agreement. One is called a cross-purchase agreement, the other an entity-purchase agreement.

In a cross-purchase agreement, each partner buys a life insurance policy on the other partners. When one partner dies, the others use the proceeds from their policies to buy the deceased partner’s share at a pre-agreed-upon price.

An entity-purchase agreement involves the company itself buying a policy on each partner. When one partner dies, the company will receive the proceeds and use them to buy out the deceased’s share of the business.

The partnership agreement also must include provisions for the exit of a partner voluntarily, for instance, deciding to retire or deciding the business life no longer interests them. This provision would have to cover both a sale of the partner’s share to an outside buyer and a buyout from the other partners.

Corporate Succession Planning

If you are a shareholder in a corporation with other shareholders, incorporating buy-sell provisions in a so-called “shareholder agreement” or adopting a buy-sell agreement will provide guidance should you, or any other shareholders, decide to retire, suffer a disability, or tragically die. These agreements provide a road-map to enable the remaining shareholders to follow agreed-to succession planning for the purchase of the shares of the person moving on from the corporation, avoiding fights and possibly litigation while protecting the families. To provide for possible death, purchase of the cross-purchase life insurance policies or entity-purchase life insurance as is the case with a partnership assists in funding the buyout of the deceased shares.

Limited Liability Company Succession Planning

In the case of a limited liability company, business succession/buy-sell provisions are generally incorporated in the operating agreement of the company. Similar to a partnership agreement, the operating agreement can incorporate business succession/buy-sell provisions to provide for the seamless succession planning, whether a so-called “member” of the company desires to sell all or a portion of their membership interests, becomes disabled or dies. Again, as with the partnership and corporation, these provisions are designed as a road map to enable the member to provide for the success of the business after departure as well as assure that such member’s family are protected at such time.

Business Succession Attorney in Palm Desert, California

There is no “one-size-fits-all” business succession plan. You really need to consult with an experienced business law attorney to put all the proper legal instruments in place.

If you own a business as a sole proprietor, are a partner in a business, a shareholder of a corporation or member of a limited liability company, let us review what you have in place – including the partnership agreement if applicable – and advise you of your best options moving forward. Much will depend upon your goals for the future and the needs of you and your family.

Given that there are numerous options that can be incorporated into the partnership agreement, shareholder agreement, operating agreement or any buy-sell agreement, guidan
ce provided by an experienced business succession attorney can be critical for the health of the business as well as protection of all shareholders and their families.

A business succession plan needs to be integrated into your estate plan. If you already have a will or living trust, we should review them as well. If not, we can certainly start fashioning your estate/business succession plan from the ground up.

Although the Law Offices of Jerry J Goldstein is located in Palm Desert, California, we serve all neighboring areas, including the entire Coachella Valley as well as communities in and around Imperial, Los Angeles, Orange, Riverside, San Bernardino, and San Diego counties.

Please note that in providing services outside of our immediate area, we generally don’t bill for travel time from our offices to meet at the business location or home of our clients.