Do you really need a buy/sell agreement?
Sep 13, 2010
Dave and Jim, brothers in their late 50s, had just celebrated 60 years of the farming operation being held within the family. The next morning, Jim was out doing routine farm chores and suffered a fatal heart attack. Dave suddenly lost his brother, best friend and business partner. After the estate was settled, Dave found himself with a new business partner and owner, Jim’s wife, Carol.
This was a recipe for disaster at the onset. Carol had no experience working in the operation and no interest in learning the ins and outs of the business. In addition, Jim and Carol had no children who were actively involved in the operation, thus Carol had no motivation to remain an owner. Medical bills had piled up and she needed cash to fund her daily living expenses. She went to Dave and asked him to buy her out. Since most of the value was tied up in land and equipment, Dave did not have the resources (cash) available to buy her out. Dave was forced to sell land and equipment on short notice below fair market value, destroying the family farming operation.
How could this tragedy been avoided? A properly structured buy/sell agreement could have preserved the business, provided a means to purchase Carol’s ownership interest and supplied the much needed income for Carol and her family. A buy/sell agreement should be in place for every closely held business with multiple owners. It provides a ready market for selling an ownership interest, establishes a valuation method and spells out the terms/conditions of purchase without placing an owner at a bargaining disadvantage.
All of the owners should agree to the triggering events to be covered in the buy/sell agreement. Common events include death, disability, retirement, dissolution, withdraw prior to retirement, and other circumstances that may cause an owner to divest of an ownership interest – divorce, bankruptcy, legal judgment, etc.
In my next blog I will tackle additional continuity issues that face your operation should you leave unexpectedly…
