Family businesses and small businesses account for 90 percent of all businesses in Virginia.
Just under half of all family businesses in Virginia at any given time are in the process of transition from one generation of owners to the next—and many fail at this critical moment as a result of poor planning.
People, burdensome taxes, and lack of operating capital are the main culprits—avoidable with proper planning.
Just like the need for estate planning is ever present, so too is business succession planning. And our firm designs our estate plans for business owners with that added feature—business succession planning, if desired.
You simply don’t know when you will become injured, disabled or die—thus planning is needed, today, for peace of mind and financial security of your family, and the business left behind.
Life insurance can assist in the short term with capital management of the business, but a buy-sell agreement should also be considered.
The Business Buy-Sell Agreement (BSA)
A Buy-Sell Agreement can be triggered, just like your estate plan, upon your death or disability.
This agreement can transfer the business in an orderly way, and include life insurance payments, paid by the business, to fund the business purchase.
A Buy-Sell Agreement can be established, even if your business has multiple owners. And the Agreement is binding on third parties, like estate representatives and heirs, reducing conflict in the transition.
Subject to certain Family Attribution Rules under Internal Revenue Code § 318, a BSA can help establish a value for the business that is binding on the IRS for federal estate tax purposes as provided under Internal Revenue Code § 2703.
Different Types of Buy-Sell Agreements
Typically, buy-sell agreements will come in one of four formats:
- Entity Buy-Sell;
- Cross-Purchase Buy-Sell;
- Wait-and-See Buy-Sell;
- One-Way Buy-Sell
In an Entity Buy-Sell, the business entity agrees to purchase the interest of a business owner.
Under a Cross-Purchase Buy-Sell, the business owners agree to purchase one another’s interests.
The Wait-And-See Buy-Sell gives the entity a right of first refusal to purchase the interest before the remaining business owner(s).
A One-Way Buy-Sell occurs when the sole, one business owner sells to a third party purchaser.
Whichever Buy-Sell you select, like a Trust, it is no good without proper funding.
Funding a Buy-Sell Agreement
To fund the purchase obligation under a BSA include:
- personal funds,
- a sinking fund in the business itself,
- borrowing funds,
- installment payments and insurance (insurance being the most common).
Of these options, only the insured option can guarantee complete financing of the purchase from the beginning.
Accordingly, a proper BSA will include both disability buy-out insurance and life insurance.
Since the health of the business owner determines their insurability, any delay in acquiring appropriate coverage could be fatal to the success of the BSA and, with it, the survival of the business itself.
The Next Step: Don’t delay good planning for yourself and your business, call Van’s assistant at 804.325.1245 or 757.941.4298 to schedule your first meeting.
Attorney Van Smith also routinely assists business owners by advising them on strategic and legal decisions. Van drafts contracts, collects from nonpaying customers, and serves as registered agent for several privately held family businesses of long-term clients.
Van looks forward to meeting you and establishing a long-term relationship for your business and personal needs.