Imagine that on the eve of your wedding, you make a plan to divorce your spouse, on friendly terms, in about 15 years. During those 15 years, you agree to work diligently and successfully to build a business.
On the preordained day that your marriage ends, you announce you are willing to give your soon-to-be ex-spouse one-half of your company’s business value in cash. Additionally, you let your ex-spouse value your company, because those are the terms of the agreement the two of you signed a year after you were married.
Though this scenario may seem ridiculous, you may have done something quite similar in your business with your co-owners.
Few owners begin working together with an expectation of future acrimony, much less litigation. Fewer still give thought to one day leaving the business - even on friendly terms. Indeed, most exits are not precipitated by a disagreement among co-owners; instead, owners leave for a variety of reasons and simply want to do so with their share of business value.
Remember: One day, you will leave your business.
Over time, in business, as in marriage, partners can grow apart. We’ve all witnessed the resentments, discord and wastefulness of a friend’s needlessly nasty divorce. Business divorces can be equally unpleasant, but with an added twist - owners may be unable to leave the business, or force a partner to leave, without appropriate tax and legal planning.
When an owner or co-owner wants out, what will happen? Chances are that when owners and co-owners turn to the company’s buy-sell agreement, they will find that it is woefully out of date. They may also find it controls the terms of their exits from their businesses, not only upon death but also during the owner’s lifetime.
If you haven’t looked over your company’s buy-sell agreement since you signed it, dust it off and check at least four of these key provisions:
Lifetime and death transfers of ownership
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