Wisdom of the Crowd
Dear FBC members and partners,
As you know, the Family Business Center of Pioneer Valley is a learning community where you can all be experts and resources to each other.
What one of you has perfected, others can begin to improve. What one of you has failed at, another can be forewarned of.
But how do you know who has done what, well or badly?
In this case, one of our members is is looking for some feedback, as follows:
"My sibling and I have started our Estate Planning in case one of us leaves this fine Earth unexpectedly. We have an attorney, we have a trusted accountant, we have an insurance company. What we don't have is the experience of other family-owned business owners who have completed/crafted creative buy/sell agreements. Any ideas on where I could begin? Any help/guidance you can offer would be most appreciated."
NOTE: whatever is posted below is NOT legal or accounting advice for any reader, but merely the shared experiences of those willing to share their perspectives...consult your expert advisors before doing anything this important!!
contribution # 1:
Buy Sell Agreements
- Sign something now. It is potentially disastrous to have a stockholder die with no signed agreement.
- Restrict stock ownership – no spouses can own stock.
- Require estate to sell stock at death to Company or other stockholders. Delay closing up to 180 days after death.
- Value stock at death at a stated value (a percentage of audited book value – 75% to 125% is the normal range). Use a lower valuation for disability. Consider 5-year “tag-a-long” provision for estate. Sign stated value form annually.
- Purchase life insurance for at least 50% of obligation.
- Allow balance of purchase price above life insurance proceeds to be paid over a 10 to 20 years at low interest.
- Allow skip payments under a subordination agreement not to exceed one year. Bank and/or surety must invoke right.
- Include salary continuation for one year after death and up to three years after disability. Salary ceases after redemption.
- Use “cross-purchase” method to buy stock. Individual stockholders purchase insurance on each other and purchase stock to extent of insurance.
- Include instructions for the catastrophic event of multiple simultaneous stockholder death.
- Set-up bonus program for retention of key employees until backlog is complete.
- Use “fair market value” for valuation purposes. Appraisals will create problems. Exception – non-business assets.
- Require redemption for voluntary separation from Company. Redemption of living stockholder should be based on “right of refusal”.
- Require redemption for disability. Redemption should be based on ability to fund the buyout. Salary continuation should be in effect until redemption.
- Allow non-working heirs to vote stock.