You and Mary run a lemonade stand as 50/50 owners. You opened for business on a handshake. Mary dies. Do you still have a business?
Mary’s husband or child may be your new business partner. Do you have the opportunity, obligation or resources to buy them out? If so, at what price and what are the terms?
Are you better off starting your own lemonade stand, or sticking with the challenges of the old one?
What if you die instead of Mary?
Without proper business planning, surviving family members may have to become active in your business, or it may be liquidated or sold to outside parties. Are you okay with this?
Buy-sell agreements can be used by nearly any type of business: corporations, limited liability companies (LLCs) or partnerships. They are not a one-size-fits-all solution. Please consult with your family, tax advisor and lawyer in preparing an agreement before any decision is made. Be sure this arrangement meets your current and long-term goals.
A buy-sell agreement is a document that determines the value of the shares or business interest, and the process involved, in cases such as:
- Death of a co-owner.
- Disability of a co-owner.
- Retirement of a co-owner.
- Divorce of a co-owner.
- Departure of a co-owner.
- Bankruptcy of a co-owner.
- A falling out between co-owners.
- Desired sale of shares to a third party.
The method used to value the shares or business interest is the most important part of a buy-sell agreement. No one enjoys over-paying for a business. On the other hand, it is in the owner’s best interest to ensure he or she—or a successor—receives fair market value for his or her business interest.
You should get regular independent appraisals of the value of your business interests, especially if family members are involved. Accurate and fair valuation also fixes the value in the deceased’s estate for federal and provincial tax purposes. Some of the ways to purchase a business interest are with:
- An owner’s personal funds.
- A company cash flow.
- A sinking fund (business money set aside over time).
- A bank loan.
- Installment payments.
- Life insurance.
The choice is yours: Plan ahead, or take a chance and figure it out when disaster strikes. Please seek professional advice to minimize your potential personal and tax liabilities, and for assistance with finding a cost-effective means to fund the agreement. Business is personal. Don’t wait to discover the cost of failing to plan when you find yourself in business with someone you never chose.
A fully funded buy-sell agreement provides peace of mind money can’t buy.
Kevin Davidson is a stewardship consultant at the Calgary, Alta., office of the Mennonite Foundation of Canada (MFC). For stewardship education and estate and charitable gift planning, contact your nearest MFC office or visit MennoFoundation.ca.