| Determining how, when and to whom to transfer ownership By Charles D. Epstein, UMass Family Business Center One of the difficulties most family business owners face is determining how, when and to whom ownership interest will be transferred. Even in the best circumstances, the transfer can be difficult because emotions run high and the process is cumbersome. A buy-sell agreement is one tool to help keep the disposition of shares an objective process. Buy-sell agreements are particularly beneficial for family businesses because they create a ready market for shares that would otherwise be difficult or impossible to sell. For instance, when you die, your heirs may be hard pressed to find a buyer for your shares. Rather than being saddled with having to find someone on their own, your heirs would simply go to your former partners or the company to redeem your interest in the business. A buy-sell agreement can keep business ownership away from "outsiders" by providing the other owners with a right of first refusal and a means to pay for the shares they're purchasing. For instance, if Judy and Chris are equal partners in a business valued at $2 million, each would acquire a $1 million life insurance policy on the other. If either one passes away, the other would use the proceeds from the life insurance to acquire the deceased partner's shares. The mechanics are similar if they purchase disability policies instead. Most likely, the buyout would be over a period of time rather than all at once. The agreement should indicate the interest rate to be paid on the outstanding amount. 2. Redemption. Under a redemption agreement, it's the business - not the individual owners - that buys the insurance on the owners. So the company would acquire the shares of the deceased partner. Going back to the previous example, if Judy and Chris decided to have their company buy the insurance, the survivor would be the 100% owner of the shares because the company would retire the deceased partner's shares. Redemption agreements can be particularly beneficial when there are a lot of owners, because many fewer insurance policies are needed than under a cross-purchase agreement. 3. Hybrid. This type is a combination of the cross-purchase and redemption agreements. Generally, the agreement would require that the shares first be offered to the business for redemption purposes. If the company were unable to pay for the shares, the other owners would be responsible for buying their former partner's interest. Which one is best for you? There is no one-size-fits-all buy-sell agreement for everyone because there are numerous factors involved, including your business structure, the company's financial status, state rules and the needs and circumstances of the individual partners or owners. Although it's important to have an agreement in place, don't rush. Otherwise, you and your loved ones may still have a difficult time navigating the sale of shares during an emotional time. Charles D. Epstein, CLU, ChFC, AIF® is a Certified Family Business Specialist and the founder of the UMASS Family Business Center. He can be reached at 413-734-6418 or cdepstein@finsvcs.com |
