|Buy-sell agreements a family business
There's a saying that sums up the
precarious nature of family businesses: "Shirt sleeves to shirt
sleeves in three generations."
In fact, financial advisers estimate
that 65 percent of family businesses fail in the first generation
and more than 90 percent bite the dust in the second, leaving the
third generation to roll up its shirt sleeves and start from scratch.
Human nature plays a big role. Typically, the kids, having enjoyed the fruits
of Mom and Dad's success without appreciating the hard work behind it, lack the
creativity, dedication and vision to carry it forward.
But failure to plan for transitional life events --
the death, disability, divorce, withdrawal or retirement of an owner
-- can not only topple a business, but fracture the family as well.
There is a powerful preventative measure that can
preserve a family's love and livelihood: the buy-sell agreement.
In it, owners specify a course of action when a "trigger event"
such as death, divorce or a withdrawing partner places a business'
ownership, or even its continued existence, in jeopardy. The agreement
is often included as part of the company's overarching operating
Contrary to what you might expect, a typical buy-sell
agreement is designed to prevent, rather than facilitate, the sale
of a business. Here, buy-sell refers instead to how an owner's shares
may be sold, to whom, and at what price, upon his or her departure.
Think of it as a prenup for businesses. And, just
as with marital prenuptial agreements, family partners are often
skittish about drafting one. It seems cold, calculating and counterintuitive
to discuss family members or spouses in a business context, much
less one that includes your own demise. That's right, all the fun
of a prenup and a last will and testament rolled into one!
Who needs it, right? You do,
if you're in business with your family or stand to inherit property in co-ownership
with your siblings.
"It's quite important," says
Randy Fairfax, a fee-only financial consultant with Highland
Consulting Associates in Cleveland. "Because sometimes they don't keep
hugging each other."
Buy-sell agreements are as individual
as snowflakes, no two quite alike. But they tend to have these features in common:
Statement of purpose
What is most important to you as owners? Do you want a nice income
stream for retirement or will you plow profits into the company
for the next generation? In all likelihood, the purpose of the business
founders and the second and third generation will differ markedly.
The key is to arrive at a purpose for the business that all parties
can live with. Much of the rest of your buy-sell agreement will
hinge on it.
Here's the delicate part. Some families choose to limit
ownership or controlling stock, say, to bloodline descendents, meaning spouses
Steve Faulkner, national managing director for JPMorgan's
closely held asset management and valuation advisory services group,
says that's not as cold as it sounds. It's important to distinguish
between participating owners, whose function is key to the health
of the business, and nonparticipating family members who merely
receive a share of the profits.