According to Joseph Astrachan, editor of the Family Business Review, less than 30% of family businesses survive succession from the founder to the next generation. Family businesses that do survive from generation to generation tend to be carefully planned and prepared for the eventual transition of ownership from one generation to the next.
A lot goes into creating a successful business succession plan. Some things owners must think about include: what will happen in the event of their retirement, death, or disability; unique family circumstances that may affect successful transition; if the business will be sold or gifted; the value of the business; potential tax consequences; and buy-sell agreements.
A buy-sell agreements describes how ownership interest may be sold and for how much. Buy-sell agreements should be created fairly early in the life of a business, but if your business has been around awhile and you don’t have a buy-sell agreement, it’s not too late. There are three main types of buy-sell agreements:
- Stock Redemption Plan: The stock redemption plan, also known as an entity-purchase agreement, requires the business to purchase an owner’s interest in the event of the owner’s retirement, death, or disability.
- Cross-Purchase Agreement: In a cross-purchase agreement, a business owner agrees to sell his or her interest to the remaining owners and remaining owners agree to buy it in the event of a co-owner’s retirement, death, disability or other triggering action as set forth in your agreement, such as divorce or bankruptcy.
- Hybrid Agreement: A hybrid agreement is a combination of the stock redemption plan and the cross-purchase agreement.
It is not enough to simply establish a business succession plan; the plan must be properly funded. Common sources of funding include: life insurance, long-term disability insurance, personal funding, borrowed funds, and installment payouts.
Our New Mexico estate planning lawyers can not only help you understand the key differences between a variety of buy-sell agreements and help you choose the best buy-sell agreement for your business, but help you establish a solid business succession plan. We will take the time to really understand your business and provide you with the knowledge you need to make informed decisions about the future of your business.