Business Buyout Agreements: Plan Now for Retirement, Death, Divorce or Owner Disagreements [With CDROM] Paperback – Jul 12 2010
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This book first sets the stage by describing what can happen. What happens when one of the partners wants to quie, goes through a messy divorce (he's a good partner, but now you're partner with his ex!), or if he is simply disabled (alcohol or Alzheimer's).
The answer, of course, is advance planning. Business Buyout Agreements does a lot of this planning for you. It describes the situation, what should be included, all the things that you need to think about. In fact, it describes more situations than you are ever likely to think about in advance.
The book includes a CD-ROM which has a worksheet and a buyout agreement that has been successfully used by dozens if not hundreds of companies.
This book is about Business Buyout Agreements and its terrific. Buyouts are complex situations and they have to be done right early in the game when everyone is happy, healthy and convinced they are all going to get rich together forever. In short, the buyout agreements typically get done at the worst of all possible times, when partners don't know what they will one day have except a shared dream. The first section of the books describes situations, what it was and how it ended. There are a few nightmare scenarios mentioned, when divorce interferes, or one partner becomes disabled. It sparks the brain to thinking about the things that are unforeseen but do happen in life. Its very common that a partner dies and leaves their half of your business to their spouse who knows nothing about the business except that they now expect you to do all the work that you and your partner did.
There are solutions and the book does an excellent job of describing steps, whether to purchase life insurance (Entity or Stock Redemption), how they are structured and which would be better in certain situations. It doesn't have to be life insurance. There are insurance models that kick in on disability. There are planning techniques that can be applied and Nolo does a good job in educating the consumer on those techniques.
This book will not be confused with a law text. It is written for the consumer who wants to learn what they need to know and the book does an excellent job of doing just that. Well recommended.
This book is thorough, and covers both voluntary and involuntary transfer of ownership. For example, not only does it discuss how a buy-out agreement may cover the buy-out of an owner disabled by sickness or accident, it discusses the importance of defining "disability". How about if an owner loses a license needed for operations? What if an owner goes into personal bankruptcy (for circumstances not connected to the company)? A divorce, where the "leaving" spouse is awarded part of the corporate stock in the settlement is not uncommon, because the company stock may be one of the biggest assets of the owner getting divorced.
In each of these circumstances, if the stock certificates do not have notations indicating that they are subject to the shareholder's buy-out agreement, the remaining shareholders may be subject to a convoluted and expensive mess. A fair buy-out is just as important to the departing owner. For example, if you are disabled and need the cash now to pay medical bills, a buy-out agreement could help insure that you don't have to settle for a fire-sale price on your stock.
The authors give you a good run-down on possible tax issues, but if your situation or goals are complicated, they recommend you take your form to a tax advisor before finalizing.
The chapter on Structuring Buyouts notes that if the corporation or LLC is buying back the stock of a departing owner(instead of the other owners personally buying the departing owner's stock), the buy-out needs to keep in mind the state's rules on financial solvency. That is, after the buyout, the company must still have a financial statement that meets state requirements. The state may require, for example, that a corporation have total assets equal to 150% of total liabilities. If not carefully structured, a buy-out could result in significantly reduced assets (cash paid to departing owner) or significantly higher liabilities (a new note payable to the prior owner) that would keep the corporation from meeting the solvency requirement.
I will add that even if the remaining owners are purchasing the stock personally, they need to pay attention to state requirements if the remaining owners need to borrow from the corporation to pay the departing owner, or if the remaining owners need to take unusally high salaries or withdrawals to pay the departing owner.
Not mentioned in the book is the additional possible solvency requirements of a financial institution or bonding company. I worked as a surety bond underwriter for 28 years. Most of our accounts were contractors, but other types of companies also require bonds. I saw instances where the kids carrying on the company wanted to buy out their retiring father, but doing so raised the corporate debt so much that it was more difficult for the construction company to qualify for the same bonding limits it had before the buy-out.
In the same vein, many companies have a bank line, a short-term lending facility for cash flow purposes, generally for a term of not more than one year. It is common for a bank to add solvency conditions to a bank line, such as a maximum debt to worth ratio. If the corporation's debt ratio goes too high (because assets are lower or debt is higher or net worth is lowered because the corporation buys back stock), the bank can declare the loan in default even if payments have always been made appropriately.
If you're married, plan to get married, or have any business partners or investors, I think this book should be required reading before you get too far into developing your business. And if your business partners or investors are married, or have any other business interests, it becomes even more important.
Things may be all happy today. You may all have an understanding of where you collectively think things will eventually go, but things change! You can't anticipate every change, but you need to have some idea of what you need to do to protect yourself for those changes.
Of course the more complex things are, the more important it is to have an attorney involved, too, but you should be going into the attorney's office knowing something about what questions to ask, and what general direction you want to go. And this book is important in that aspect too.
Unless the reader has an excellent legal mind, I still recommend the final agreement be written by a lawyer because, unlike many Nolo topics (and I've read many), buyout agreements, I feel, are particularly complicated and because when the buyout event occurs, it can be very costly.
The book advises that these following situations definitely requires a lawyer and tax advisor input: family business owners, minority/majority owners, owners with vastly different needs, and older owners.
I'm sure some very smart people can use this book to create binding documents. And, if financially tight, necessity will create the ability to correctly use this document. But, the best use of this book, in my opinion, is to understand one's options in negotiating the business buyout agreements and then to lower one's legal and tax advisor costs by being an intelligent client for lawyers and tax accountants.
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