A buy-sell spells out specifics.
Chet Esther can rest easier now that he has inked a buy-sell agreement between himself and his sons, Ryan and Chad. The agreement took months to finalize and forced the family to talk about difficult what-if issues such as farm valuation, disability, divorce and dissolution.
"We’re not the kind of family that likes to think about the negative, but it was important to talk about what could happen in the future so we could protect the business," says Chet, who farms with his sons near Beardstown, Ill.
The buy-sell agreement is a crucial part of the succession plan that Chet is working through as he prepares to transfer his farming operation to his sons. The agreement obligates one business owner to buy the business upon the retirement, death or disability of the other business owner.
"Farmers are shocked when I tell them a buy-sell agreement is one of the most important documents in succession planning," says Kevin Spafford, Farm Journal succession planning expert. "Often, such an agreement is not even on their radar. Yet a buy-sell is the one document that ensures the operation remains in the family."
The Esthers’ buy-sell contract is established between Chet and Ryan, who own Esther Family Farming Company (EFFCO) together, and Ryan and Chad, who own Esther Farms, from which all future growth of the farm will come.
Difficult business decisions. The agreement states that upon the death of any partner, the partnership shall continue the business without interruption. It also details what will happen if a partner desires to withdraw from the partnership.
In working through their buy-sell contract, the Esthers decided the purchase price for the partnership interest of a deceased partner would be determined by calculating a three-year rolling average of the net equity in the partnership. The exception is that in no event shall the purchase price be less than the one-sum death claim proceeds of all the life insurance policies on a partner’s life.
Buy-Sell Review Tool
With so many components involved in a buy-sell agreement, it makes sense to periodically review your contract. The Farm Journal Legacy Project provides an online tool to help assess the viability of your current agreement and identify the areas that should be updated. It can also be used to ensure that new agreements include (or at least considers) the relevant points, provisions and mechanisms.
This tool walks you through a series of yes/no questions to assess your buy-sell agreement. For example, are there any provisions conditioning ownership/acquisition based on family relations or other factors? Have the spouses agreed to accept the terms of the agreement with regard to community property/marital interest? When it comes to method of valuation, are you using an appraiser or formulation method?
Check out the Buy/Sell Review Tool.