Business Succession Planning Buy-Sell Agreements

Summary:

A buy-sell agreement is a legally binding contract in which the owners of a business set forth the terms and conditions of a future sale or buy back of a departing owner’s share of the business. Specifically, buy-sells control when owners can sell their interests, who can buy an owner’s interest, and at what price.

Buy-sells can accomplish many objectives, but are primarily used to ensure the smooth continuation of a business after a potentially disruptive event, such as an owner’s retirement, incapacity, or death.

Also valuable estate planning tools, buy-sells can provide for the orderly succession of a family business, and for the liquidity needed for payment of a deceased owner’s estate settlement costs and taxes. Further, if structured properly, a buy-sell can establish the purchase price as the taxable value of an owner’s business interest, avoiding unexpected estate tax consequences at the owner’s death.

What is a buy-sell agreement?

Buy-sell agreements are very important planning tools that can accomplish many things for a business with two or more owners. Sometimes referred to as a prenuptial or premarital agreement among business owners, a business continuation agreement, a stock purchase agreement, or a buyout agreement, a buy-sell is a legally binding contract that establishes when, to whom, and at what price an owner, partner, or shareholder can sell his or her interest in a business.

A typical buy-sell allows a business entity or other business owners the opportunity to purchase a departing owner’s business interest at a predetermined price. This allows the business and the remaining owners to protect themselves from future adverse consequences, such as disruption of operations, entity dissolution, or business liquidation that might result if certain events, such as an owner’s sudden incapacity or death should occur. This can also minimize the possibility that the business will fall into the hands of outsiders.

The ability to fix the purchase price as the taxable value of a business interest makes this tool especially useful in estate planning. Agreeing to a purchase price while all parties are alive minimizes the possibility of unfair treatment to a deceased owner’s heirs. And, the IRS’ acceptance of this price as the taxable value can help minimize estate taxes on the deceased owner’s business interest.

Additionally, because funding for buy-sells is typically arranged when the buy-sell is executed, the possibility that funds will not be available when needed is minimized, and a deceased owner’s estate can be provided with needed liquidity for expenses and taxes.

Tip: Buy-sells are also used to give a business and co-owners the right to buyout an owner (force an unwilling owner to sell), or to give an owner the right to force the business or co-owners to buy him or her out.

How does a buy-sell agreement work?

A buy-sell can be a separate agreement or can be created by including buy-sell provisions in a business’ operating agreement.

A buy-sell must clearly identify the potential buyers, any restrictions and limitations, and the conditions under which a sale will occur. Sale triggering events typically include:

• Death
• Long-term disability
• Retirement
• Divorce
• Personal insolvency or bankruptcy
• Criminal conviction
• Loss of professional license
• Resignation or termination of employment

A buy-sell should set forth the purchase price or a formula for determining the purchase price. Without establishing this price in advance, lengthy disputes and lawsuits can arise at the time the ownership interest must be bought back.

Fixing the estate tax value of a business interest

One of the advantages of buy-sells is the ability to fix the purchase price as the estate tax value of a deceased owner’s business interest, which can help avoid future valuation problems with the IRS. When using a buy-sell to set the estate tax value of a business interest, careful drafting is essential. To pass muster, all buy-sells must pass the following four-part test:

1. The estate must be obligated to sell the business interest at the price set forth in the buy-sell
2. The buy-sell must place certain restrictions on lifetime transfers of the business interest
3. The value of the business interest must be fixed by, or determined from, the buy-sell
4. The buy-sell must be a bona fide business arrangement, and not a transfer for less than adequate consideration

When the buy-sell involves family members, it must also be proven that the transaction is comparable to arms-length sales between unrelated persons, and was entered into for a bona fide business purpose.

Caution: Determining the fair market value of a business may require an independent business valuator. The IRS can impose harsh penalties for understating the value of an asset for estate tax purposes.

Financing the buyout

For a buy-sell to be successful, funds must be available to carry out the terms of the buy-sell. Without a funding plan in place, the buyer(s) may be forced to sell assets, take out loans, or even file for bankruptcy.

There are several ways to fund a buy-sell, including:

• Cash
• Borrowings
• Installment sale
• Self-canceling installment note
• Private annuity
• Stock redemption
• Sale-leaseback
• Appreciated property bailout
• Deferred compensation
• Life insurance
• Disability insurance

Factors that generally influence the choice of funding method include:

• Business structure, size, and tax bracket
• Number of owners, their ages, tax brackets, and ownership percentages
• Levels of cash or credit available to the business or the owners
• Type of buy-sell agreement

Depending upon the specific details, there might be just one funding method that is appropriate, or there may be several funding methods that could be used.

Structuring buy-sells

Buy-sells can be structured to meet the needs of both the business and the owners, taking into consideration tax consequences and individual goals. There are four basic structures for buy-sells, and some combinations are possible. A very brief description of the four basic structures follows.

1. An entity purchase buy-sell obligates the business to buy the interests of each departing or deceased owner.
2. With a cross purchase buy-sell, each owner agrees to buy a share of a departing or deceased owner’s interest. The business is not a party to this type of buy-sell.
3. A unilateral or one-way buy-sell is used when only one owner is selling an interest, and is typically used in sole ownership situations where the owner is arranging to sell the entire business to a family member or key employee.
4. A wait-and-see buy-sell is used when the parties are unsure whether the business or the owners will buy the business interest. Typically, the business is given the first option, and if it does not exercise the option, the remaining owners are given the opportunity. If the remaining owners do not exercise their option, the business is obligated to buy the interest, just as with an entity purchase buy-sell.

Tip: It is not necessary that the same buy-sell apply to all the owners of a business.

Suitable clients

• Business owners who do not want to be forced to work with or share control of the business with a stranger who buys an interest from a departing owner
• Business owners who do not want to be forced to work with a spouse or other family member of a deceased or divorced co-owner
• Business owners who do not want to end up co-owning the business with a bankruptcy trustee or creditor if a co-owner experiences personal financial difficulties
• Business owners who do not want their heirs to inherit a business for which they cannot get a fair price
• Business owners who do not want to engage in pricing disputes with heirs of deceased co-owners

Example

Steve and Jack are brothers who loved cars as teenagers. Steve could fix just about anything and Jack went to all the car shows and talked to anyone who would listen about the new models.

As soon as they graduated college, Steve and Jack borrowed some money and bought a car dealership. Over the years, they built a very successful business–Steve ran the operations while Jack took charge of sales and marketing.

While their business thrived, their personal lives flourished as well–each marrying and having several children. But then, one day, Jack unexpectedly had a heart attack and died. Jack’s family was overwhelmed with shock and grief. After several weeks, Jack’s widow, Norma, came by Steve’s office. Norma was very nervous–she needed to broach the subject of her husband’s interest in the dealership, but knew Steve was having a difficult time managing the business on his own. Norma was having her own financial difficulties, however, having a large mortgage to pay and two children in college. She couldn’t put off this meeting, even if it resulted in tension and bad feelings.

To her delightful surprise, Norma soon discovered how much foresight her husband and brother-in-law possessed. They had executed a buy-sell agreement many years ago, just in case such an unfortunate event should occur, and financed the agreement with life insurance policies on each other’s lives. Steve was in the process of claiming the proceeds and would pay Norma the agreed-upon purchase price.

Norma received her rightful share of the business, in cash, with which she was able to meet her family’s needs. Steve was able to continue the business with no interference. And though it wasn’t quite the same, he hired a sales and marketing manager to take over his brother’s duties, and the dealership continued to operate successfully.

Advantages

• Assures continuation of a business
• Assures a smooth transition of a business
• May prevent loss of entity status due to restrictions on transfers of interests (S corporations and limited liability companies)
• Provides assurance to creditors, customers, and employees
• Guarantees a buyer for a departing owner’s interest
• Can prevent outsiders from gaining control of business
• Establishes a taxable value in advance, minimizing estate taxes and potential valuation conflicts with IRS at time of owner’s death
• Protects heirs from unfair treatment
• Ensures estate liquidity

Disadvantages

• Depending on the type of buy-sell, there could be adverse income tax consequences to the business and/or the owners
• Meticulous drafting is required–improperly drafted buy-sells can result in unintended consequences and tax code violations
• Valuations may need to be updated from time to time
• If funded with insurance, care must be taken to provide continuing coverage

Waddell & Reed
Mahari A. McTier
Financial Advisor
2809 Butterfield Rd
Suite 170
Oak Brook IL 60523
(630) 954-4611ex: 141
205-266-1570
mmctier@wradvisors.com
www.mmctier.wradvisors.com

The Color Purple coming to Birmingham October 20 – 25

From the classic Pulitzer Prize-winning novel by Alice Walker, and the moving film by Steven Spielberg, comes a soul-stirring new musical and landmark Broadway event.

THE COLOR PURPLE is an inspiring family saga that tells the unforgettable story of a woman who – through love – finds the strength to triumph over adversity and discover her unique voice in the world. Set to a joyous score featuring jazz, ragtime, gospel and blues, THE COLOR PURPLE is a story of hope, a testament to the healing power of love and a celebration of life.

Directed by Gary Griffin, THE COLOR PURPLE is adapted for the stage by Pulitzer Prize and Tony Award winner Marsha Norman, with music and lyrics by Grammy Award winners Brenda Russell, Allee Willis and Stephen Bray and choreography by Donald Byrd.

Click here for tickets

The Magic City Classic is the most attended HBCU Classic in the Country!

Did you know that the Magic City Classic is the most attended HBCU Classic in the Country!  Well you should because we told you last year!  LOL.

The Magic City Classic is fast approaching and you know we are busy adding a complete line up of classic weekend events so you can start planning.

Promoters and business owners don’t miss out on your chance to advertise in the Classic Weekend Event Guide. Click this link to find out more: Classic Weekend Event Guide!

Magic City Classic Resources!

• Official Website
• Urbanham.com
• Hot 107.7
• 95.7 Jamz
• 98.7 FM
• Playdate Birmingham

MILES COLLEGE HOMECOMING CELEBRATION 2009

Sunday, September 27, 2009, Miss Miles College Coronation, Fairfield Civic Center, 7:00p.m.

Tuesday, September 29, 2009 Miles College Student and Alumni Barbecue and Powder Puff Football Game Miles College’s Sloan Alumni Stadium 5:00p.m. to 9:00p.m.  Powder Puff Football Game starts at 7:00p.m.

Wednesday, September 30, 2009  Essence Fashion Show with special guest Pretty Rick Fairfield Civic Center  7:00p.m. to 9:00p.m.

Friday,  October 2, 2009 13th Annual President’s Cup Golf Classic Highland Park Golf Course Shot gun start 8:30a.m.
Friday, October 2, 2009 Miles College Homecoming Step Show featuring Yung Vokals and Precession ft. Groove Miles College Gymnasium 7:30p.m.  General Admission $10.00.

Saturday, October 3, 2009 Miles College Homecoming Parade with Sherri Jackson of CBS 42 News, Ona Watson of Ona’s Music Room and Bruce Ayers of the Stardome Comedy Club as Parade Marshals.  Parade 8:00a.m. Flint Ridge Building Fairfield, Alabama ending Miles College New North Campus

Saturday, October 3, 2009 Miles College Homecoming Football Game Miles College verses Fort Valley State, Miles College’s Sloan Alumni Stadium, Kick off is at 1:00p.m.

City of Birmingham’s DYS Accepting Registrations for St. Clair Correctional Facility FREEality Check Tour

(Birmingham, AL) – The City of Birmingham Mayor’s Office-Division of Youth Services (DYS) is currently registering Birmingham Public High School students for the October 9, 2009 FREEality Check tour.  The tour is for 10th-12th graders who have been cited for blatant disrespect of authority. Students and their parent/guardian will be touring the St. Clair Correctional Facility. Transportation and lunch will be provided.
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FREEality Check is designed to expose students headed down the wrong path to the realities of incarceration by touring detention centers and correctional facilities. This up-close-and-personal experience gives troubled youth and their parents the wake-up call needed to stress the benefits of staying FREE from a life behind bars.
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DYS will register 25 students to participate in the upcoming tour. Students must be recommended by their school’s principal or guidance counselor. Registrations will be accepted on a first-come/first-serve basis until all spaces have been filled. Parents/guardians may register students at the DYS office located at 808 North 18th Street in downtown Birmingham from 9:00am-4:00pm, Monday-Friday.
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FREEality Check participants must be accompanied by a parent/guardian during the mandatory pre-tour orientation on October 5, 2009. The orientation will be at 6:00pm in the auditorium of Linn-Henley Building of the Birmingham Public Library in downtown Birmingham. Participants must also be accompanied by a parent/guardian on October 9, 2009, from 8:00am-1:00pm, for the correctional facility tour.
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For more information about the St. Clair Correctional Facility FREEality Check Tour, contact Cedric D. Sparks, Sr.-DYS Executive Director or Beverly Meadows-DYS Public Information Officer at 320-0879.

Urbanham.com presents Number One with a Bullet

For a complete line up of films to be shown at this year’s film festival visit www.sidewalkfest.com

Thank you Miley Cyrus!

I never thought I would thank Miley Cyrus but this thank you is certainly in order.  Word came out today that the BJCC needed $100K to make some quick renovations to the facility to meet the request of the company promoting the upcoming Miley Cyrus Concert. AEG, who also promotes a number of large acts including the likes of Britney Spears and Bruce Springsteen said the show could not go on without these renovations.

AEG  told the BJCC last week that the ceiling must be able to hold up to 138,000 pounds of lighting which will require steel beams to hold the additional weight.  So with such a high profile act coming to the BJCC city officials rushed to make sure the money was in place and the work will soon go out to bid for the October 23 concert.

This is nothing short of a clear sign that in order for Birmingham to attract the BIG acts  a new facility is necessary.  I realize there are plenty of people that oppose the building of the $530 million muti-purpose facility which will bring with it many unknowns.  The biggest unknown may have been answered this week as the BJCC and other officials rushed to find a solution for this show and not disappoint the thousands of little girls who have great power within their homes. Can imagine the fallout within these homes  if this show had been canceled due to inadequate facilities?  Fallout that would certainly send many who vocally opposed the facility to possibly do an about face in support of the happiness of their child.  The bottom line is without this new facility the BJCC will be faced with continued additions and repairs on the aging building with no hope of attracting high profile acts and possibly a professional sports team.  The economic impact alone from a night at a Miley Cyrus concert is huge so consider the impact with international acts coming to the city atleast once or twice a month.

Thank you Miley for showing us why Birmingham needs to support this opportunity.

Classic Weekend, promoting your business and event for success.

The HBCU football season is in full swing meaning the Magic City Classic is only a few weeks away.   We are already getting a large number of events submitted to the Urbanham.com calendar and our visitors will more than double as classic fans look for places to kick it over the long Classic Weekend.

For the past two years the Magic City Classic has held the title of the most attended HBCU classic in the country which should continue into the 2010 season.  Celebrities, tourist, alumni, college students and locals pack Legion Field, Birmingham hotels, restaurants, retail stores and bars for what is officially the ultimate HBCU classic weekend in the country. Churches also see a spike in attendance from the weekend traffic which delivers a great economic impact for the City of Birmingham.

While the magic of the Classic is all good some looking to benefit  have also discovered a level of disappointment when it come to support from classic fans.  As a promoter or business owner your task seems simple but time after time you find yourself pitted against a mental guessing game wondering if classic traffic will find your event or business.  Getting your advertising campaign started early is the key to success.  There is no doubt that people will be looking for things to do but that does not guarantee success of your event or traffic in your store.  Over the past ten years we have come across two types of  classic weekend personalities. Those that plan in advance and those that just wing it.  Those that plan in advance will know exactly what they will do for the Classic Weekend and will stick to their guns.  They have checked out local websites and talked to friends to find out what’s going on.  Only a close friend or relative will get them to change their mind.   Then there is the group that simply wings it.  This group will go with what they hear is popular for weekend and can be easily swayed if something else comes up.  They want to know where everyone else is going before making a commitment.  They may even jump from spot to spot looking for what is a good deal in their opinion.   The great thing is that you still have a shot at getting crowds from both groups to patronize you on Classic Weekend.

If you did not get started early, say July, August or early September then now is the time to start.  Look for ways to saturate your advertising as far as your budget will allow.  Do what you can and create a sensible budget that will spread your message across multiple sources and allow you to get the most out of your ad campaign.  Here are a few tips for those of you promoting events or businesses to a Classic crowd.

• Grass roots gets it! The most important thing is to get those fliers and posters out so hit the streets.  Fliers passed out four to six weeks in advance has some value to patrons.  They will post it, save it or log it in order to consider it for their weekend plans.
• Get on as many email list as you can.  Start with your personal list and then check out the Weekend Radar, First Impressions and any other list you can jump on to make sure the digital community is aware of your event.  Again consider multiple weeks of email advertising as the classic approaches.  Waiting until the last week to start an e-campaign could deliver a lack of support since email list are static in size. Meaning, unlike a website which can increase in traffic over a short period of time most email list take time to build up.  Email list do offer the hope that people will forward the email to friends and family but don’t bank on this as a sole means of getting the word out.
• Facebook helps!  I am a big fan of Facebook but remember this is a weekend for friends to flock together so groups will go out and make plans together.  Out of the 3000 people on your Facebook page, what percentage will participate is important and so is understanding that the people on your list may have other groups they are more loyal to.  Facebook should not be your only advertising option.  Make sure your friends come to support you by calling or emailing them directly and asking them to post your flier on their social pages as well.
• Get on the radio!  The week of the event is a great time to get on the radio.  Two weeks out is even better but starting the week of the event is good as you will target locals and people that are coming to town just for the game and weekend events. During the Classic radio rules with quick reminders of events as tourist and locals tune into the local stations to capture all the hype.   Remember however, you should set a budget and stick to it.  Radio sales people will get all they can out of you if you are unsure of what to spend so setting a sensible budget and sticking to it will keep things in order.  Morning and traffic jam time slots are more expensive but could be well worth it if you need a really large turnout.
• Try TV only if it fits in your budget.  People will be on the go during the week of the Classic so again radio and mobile connectivity will be the most popular outlets for people seeking classic weekend information.  The week out of the event is not a good look for television advertising but four to six weeks out should be good if you have the financial resources.
• Go to church! Church folks like to have a good time, especially during classic weekend so don’t be afraid to invite your church members to your event.
• Speaking of churches, pastors remember people are also looking for a place to wind down and seek the Word so Classic Weekend advertising is also an option for you.
• Tailgating is where it’s at!  There will be over 100,000 people around Legion Field so having enough people to promote to won’t be an issue.  Having enough information to pass out will be!  Make your way over to the field and share your marketing material with game day tailgaters and patrons.  Putting out 5,000 to 20,000 fliers should be an easy task on the day of the game so go for it!

Get in the guide!

Urbanham.com has partnered with the Birmingham View, Upgrade and the The Sword to bring you the Classic Weekend Event Guide.  This pocket sized event guide will be a great resource and keepsake for Classic Fans and event goers and we encourage promoters and business owners to make sure you get in the guide!   We will distribute between 25K – 50K of the event guides leading up to the Classic.  The deadline to get in the guide is October 7, 2009 so make sure you call today. For more information on advertising your business or event in the Classic Weekend Event Guide or on Urbanham.com call (205) 218-7416.

More Classic Information

For online access of events taking place Classic Weekend make sure you check out the Urbanham.com calendar and search on the Magic City Classic category.   Promoters this is a free place to post your events online and one of the most visited websites during the Classic for the past 6 years.

Visit the official website at www.themagiccityclassic.com for information on official classic events and important game day information.

Fashion on Canvas to feature 8 Designers, 4 Artist and 40 Models!

UPDATE:  To see pictures from Fashion on Canvas click here.

Fashion on Canvas is finally here and promises to bring a new level of creativity to Birmingham’s fashion scene.  The final week of practice gave a sneak peek at the 40  models offering a variety of looks and the professionalism and “pure” talent of the designers and participating artist.

Fashion on Canvas will bring high fashion, body art and wearable art from a talented ensemble of designers and and artist. Recently added to the show is veteran designer Nicole Young who has been a fixture in Birmingham’s fashion scene for more than a decade.  Nicole, who has taken a short hiatus, is back and will showcase a few new pieces that will certainly give you something to talk about.  The show will also feature celebrity stylist and fashion guru J. Bolin, Viola B, the perfected creativity of designer Eric Juno from the House of Gates, sassy designer J.R. Houston, the over the top sophistication of Ken Lawrence from the House of DeVinci and the always edgy designs from 15 year old Adriel Ragsdale.

In addition to the “A” list of designers artist from the Birmingham Art Collective dropped by the last week of practice to pick up some inspiration from the models as they worked the runway.  The body art will bring a new level of creativity of the show which will merge fashion with body art and wearable art.

Are you ready for fashion on canvas!

Sunday, September 20, 2009
Highland Conference Center
2012 Magnolia Avenue
Birmingham’s Southside

Pre-reception: 6:00 pm
Show: 7:00 pm

Tickets are on sale now for $15.00 which includes a pre-reception at 6:00 pm.  Click the link below to purchase tickets online or feel free to purchase tickets the day of the show.

Purchase Tickets for Fashion on Canvas

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B.O.S.S. Ultra Bar & Lounge, Birmingham’s new spot for the 30 and older crowd!

B.O.S.S. Ultra Bar and Lounge will have its Grand Opening Saturday September 12, 2009.  The night will feature the soulful sounds of Jaafar performing live as well as a combination of food, drink specials, R&B, soul music and jazz.

The unique thing about B.O.S.S. Ultra Bar and Lounge is that it will cater specifically to a mature crowd that is longing for a place to call their “spot”.    Owner Frank Haywood has dedicated almost two years in building a social environment that will offer a level of comfort, safety and class to this crowd and judging from the ambiance of the spot I believe patrons will be more than satisfied.   Mr. Haywood is striving to have a friendly environment in which friends, family and co-workers can unwind after work and on the weekend.  With the new Hyatt Hotel across the street and a couple of other downtown hotel projects in the works B.O.S.S. will offer a great night cap for tourist and people looking for an after work hang spot.

Upcoming events include NFL Kick-Off Sundays, Old School Nights, Singles Night, Fashiontini Lounge, The Neo-Soul Cafe, an exclusive Iron Bowl Party, Open Mic Night and a regular weekly schedule kicking off with a happy hour that will offer free food and drink specials.

Stop by this weekend and show your support for B.O.S.S. Ultra Lounge.

B.O.S.S. Ultra Lounge
312 20th Street South
Birmingham, AL
Phone: (205) 326-3673

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