"The greatest gift that you could give yourself may be making sure that your buy-sell agreement not only exists, but that it says what it needs to say to insure that your dream can live on to benefit those who follow your idea - yes, even generations yet unborn." - rde

We are to believe that “it is far better to give, than to receive.”  We get more joy from what we give away to deserving people, especially when we do so without expecting anything in return.  But there are several gifts that you can give yourself that will not only help you, but may end up being the lifeline to an ongoing happier relationship with those you love – especially those in business with you.  One such gift is to make sure that your buy-sell agreement for the business is not only in place - signed, sealed, and safely tucked away in your safe or lock box – but that it is up-to-date by saying contractually what it needs to say.

What is so important about a buy-sell agreement?  If you are in business with someone else, the future of everyone (owners and employees) of the business, as well as the business itself, could depend on such a document.  It continues to amaze me as to how an attorney can organize a business by creating the documents for a corporation, limited liability company, or a general partnership, and not at the same time put together the buy-sell agreement.  Why “then” you ask?  The answer, hopefully, becomes obvious.  Because at the beginning of a new idea, everyone is communicating about what is being discussed, dreaming about what can happen, excited about what the future holds, and all are usually still friendly with each other. 

What can happen?  Change!  Change!!  Change!!! Change from many sources – the ongoing threat of business climates, divorce either with a marital partner or a split up among the principals, and other unexpected, unpredictable, but certain to occur, interferences.  The fact remains that eight out of every ten business ideas don’t make it to year 11 and only three or four percent of the successful twenty percent that do, make it to the third generation.  The lack of a properly drafted buy-sell agreement is far too often the reason why.  Waiting too long can be like trying to herd cats – and that’s impossible!

There are only four things that can happen to someone involved in a successful business.
1) They can enjoy the ride of success and then retire or sell out.
2) They can become disabled, which is statistically far more apt to happen than  premature death.
3) They can die.  
4) Or, lastly, they can quit - on a good basis or an unhappy one for either or both sides.

I strongly urge that the buy-sell document contain the mission (or goal) statement spelling out what the desired, commonly agreed upon, purpose of the entity is to be.  Existing businesses without one should add such a declaration.  Here’s an example:

“Our mission remains unchanged.  Our goals are to be (as they’ve always been) to preserve our dream for ourselves, our children, and future generations, born and unborn. 

This plan for “Greenest Grass Inc.” is especially created to protect first those who invest (or have invested) their blood, sweat, and tears and who continue (or have continued) to uphold the common dream – that of continuing to be fair with each other, considerate of employees, and good stewards of our resources and supporting assets. 

Those who continue to contribute with dedicated support, patience, and respect, while adding creative ideas for increasing opportunities and profits for both short and long term, are to be the principal benefactors of the legacy of the “Greenest Grass Inc.”  enterprise.”

The document should also explain in detail just how it is to function in the event of a challenge.   The buy-sell agreement is often separated from the operating agreement.  Regardless, any document should say that there should be no penalties in determining the worth of shares held by one who retires, becomes disabled, or dies.  Nor should there be a penalty for someone who is holding up their end of the venture, but others want them out. But there certainly should be at least “two quarts of blood” left behind by someone who is disruptive not only by the timing of when they choose to depart, but how they choose to leave for “greener pastures”. 

Discounts should be offered to the supportive ones, adding to their percentages, just as penalties should be imposed on those who are choosing to depart.  Wording needs to be incorporated that would handle such situations, and be the “law” to guide resolution to every conceivable challenge.

Insurance should be in place to protect against disability and premature death.  If one becomes disabled, not only is income needed by the disabled – usually more than when healthy - but it is also expensive for the business to continue paying the disabled, especially when it also has to hire someone to take the place of the one sick or hurt.  Life insurance can provide tax-free cash to fund buyouts of the family member(s) who inherit a percentage of ownership.  Seldom should the business be either the owner or the beneficiary of insurance!  All such policies should be listed in the buy-sell agreement. 

The formula for valuation details should include how this is to be determined at each year-end.  If someone wants to sell their interest or an outsider wants to buy into a closed business, the contract should include how the business and/or family members (or the reverse) have both the first and last rights of acceptance or refusal!  If the valuations are in dispute, then it is far more economical to include the three appraiser system rather than the far more expensive process of arbitration.  Also the contract should include any payoff schedule spread over enough time and with the interest rate being the lowest IRS will allow.

You always need to be working with competent legal and tax counsel.

Obviously, you always need to be working with competent legal and tax counsel.  It is also imperative that such counsel understand what you want by familiarizing themselves thoroughly with the uniqueness of your business and the uniqueness of the owners and matching this info with the law.  Sadly, I continue to review with my “non-lawyer” mind existing documents with mumbo-jumbo collections of legal jargon that would disgust anyone this side of Harvard’s Law School. 

It seems to be common sense to me that all documents be written as best as they can with as many “nickel” words as possible, so that the whereas’s end up explaining and protecting you from the wherefore’s.  The business must have the opportunity to not only survive, but to adapt in order to profitably be able to move forward without unnecessary monies being used to defend undesired, unnecessary threats that a good buy-sell agreement can hold at bay.