How buy-sell agreements can resolve family business crises
Yet another solution is seller financing: The company gives the outgoing owner a promissory note for a specified amount to be paid off with interest over a certain number of years.
“Such an arrangement can help both parties,” Brownell says. “The business benefits from a cash flow perspective, and the seller avoids receiving one huge check subject to taxation in the year received.”
The downside here is mostly borne by the seller, whose default risk may not be adequately compensated for by the interest received.
Finally, a family business may decide to retain the outgoing owners as third-party consultants for a given number of years. This can free the business from the need to secure a large amount of cash while providing regular tax deductions for the scheduled payments. The departing executives can continue to assist the business with their managerial input, enjoy a steady cash inflow and avoid a big tax bill for a large sum received in a single year.
Family businesses should draw up and sign buy-sell agreements long before a trigger event occurs.
“It’s much easier to hash out all of the ‘what ifs’ when everybody’s healthy, in good spirits and the business is going well,” Brownell says. “You do not want to suddenly try to figure out who owns what part of the business, how people will be compensated and how the business will be valued the morning after a material event occurs.”
Such timeliness is especially important when it comes to business valuation, according to Harms.
“It’s remarkable how reasonable people can be about valuation when they don’t know if they’ll be the buyer or the seller of stock at a certain price,” he says.
Allocating company stock, valuing shares and wrestling with family personalities may seem like formidable tasks. But the result can be a carefully crafted buy-sell agreement that not only saves the business from the costs of a financial crisis, but also keeps the family functioning as a unit when something bad happens.
And a cooperative family effort is critical to success.
“Buy-sell agreements need to make sense for all the parties involved, or people will refuse to abide by them,” Spore says. “And that means the business may end up with the very problem it wanted to avoid in the first place: litigation. That’s expensive, difficult and painful for everyone.”
Phillip M. Perry is a journalist who is published in the fields of business management, workplace psychology and employment law.
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