Hello trusted podcast listeners. This is Blake Johnson, your host of the trusted podcast where we talk about all things that involve trusting others, especially attorneys. And today I want to talk about, uh, continue the business theme. And we talked about business succession planning and one of the aspects of that is a buy sell agreement. So what does that look like? Um, when, when do you need to buy sell agreement and um, is it really necessary? So a buy, sell agreement is typically done when you have at least two partners in a business. So whether it’s a, an LLC and you’re having it as a partnership Trust Attorney Las Vegas or a, you have a corporation and you just want to lay out the terms as far as what’s going to happen if one of you dies or becomes disabled. Um, you know, lot of times when you start a business, you think you’re invincible, things are going to go great, which you know, we hope they do.
And let’s say they do go great and you never get a plan in place for what would happen if one of the partners dies. You’re 20 years down the road. Have this great booming business, you want to make sure it goes to the right people. Um, but you, uh, but also you don’t want to be in partnership with, let’s say you don’t get along with your partner’s spouse and if he’s gone and out of the way, do you want to be partners with that person? Most likely not because they may not bring a whole lot of um, value to the table. Now, if they do, that’s, that’s an option. You can have it continue on that way. Uh, but most of the time it’s, it’s one, one of the spouses that are involved in the business or even, you know, if it’s, if it goes to a kid’s cause, there’s no spouses still living.
That becomes a big issue as well. So, um, ideally they would have it, uh, structured in their own trust as far as who was going to get, um, you know, their estate when they pass away without having to go through probate court. Uh, so that would be the main thing you would want to discuss with your partner. Hey, make sure you have a trust. Make sure the business is owned in that so that if you pass away, I don’t have to deal with probate court to get business decisions made and vice versa. So that’s the first I get both. Trust Attorney Las Vegas They’re all, all the partners need to have their own personal estate plan in place and um, have that trust there so they can avoid probate court. The next step is within the buy sell agreement. You say what you want to have happen. In most situations we say that it’s going to be sold to the remaining owners or sold back to the company itself.
And by so doing then, um, the funds, uh, that are go back to that person’s trust and go to the heirs at that point. So they still get something, they’re not giving the business away. It’s a lot of people that go, I’m just giving the business away. No, it’s an actual sell. It’s a transaction. So the money does go to the heirs. We’re just saying that they can’t continue on in the business. When one partner dies, we want the shares back in the business and the original owners take over. So, um, how do we do this? Well, uh, first cause we have an agreement, we say, okay, you know, let’s lay out all the terms if, if somebody dies, um, you know, how are we going to determine value of the company? Is it going to be done in our annual meeting? We’ll say, Hey look, it’s just what this is.
Is it two times net profit? Is it, are we going to get a full blown appraisal done? If there’s a lot of equipment or um, you know, properties in there, then, then that’s probably the option that you want to have. Or it’s something that can’t really be, doesn’t really, um, have a value that’s associated with net profit. So, uh, he lay that term out then. And then how has, how are you going to pay to buy this person out? The typical way to do that is through a life insurance policy. You, um, if it’s just two partners, typically you buy a policy on each other and then when the other passes, that’s the cash you use to buy out their family shares of the company. If it’s more than two people, typically what we do is the company buys the policy on all the partners and even if there’s two partners, that might be the better option because it equalizes the cost amongst all the partners Trust Attorney Las Vegas.
So if you have a really old partner, younger partner, that old, older partner is, it’s going to be a lot more expensive to insure just because their longevity is shorter. So it may make sense to pull those together and then you split the cost 50 50. Now. Um, so the, as I was saying, if the company buys the policy on all the partners, then the company is the one who buys the shares out, um, back from the, this ceased partners family and the check comes directly from them. So that, that can be great. The other nice thing about doing the, the insurance policy, uh, if you do a permanent life insurance policy, a whole life policy, um, you know, typically is the way to do it, then you can, uh, that that policy will continue to build cash value. So, even if the person’s living, you can borrow from the funds, uh, to, you know, invest in the business and, and new ventures or, um, you can use those funds to help pay for if a partner gets disabled and use those funds to also purchase their, their shares at that point.
So, um, if you don’t have, if you don’t purchase the policy, you want to lay out terms or let’s say the life insurance policy isn’t gonna have enough to pay off for what the value of that company is, you’d want to set terms as far as what the payment structure is going to look like. Is it going to be a monthly payment? Is it going to be a yearly payment? Is it over a 10 year period or is it over a 20 year period? You know, how are you gonna buy those shares, shares back, um, from the deceased partner’s family? You even want to set things such as, you know, how is interest rate going to be determined? Is it just a flat rate? Is it, you know, a percentage above prime? Is it linked to the federal reserve? All those things can go into the buy, sell agreement.
And, um, once again, you lay out that the payments are made to the deceased partners trust, uh, because their shares or their interest in the company will be owned by their trust. At that point, typically you also want to get consent from a spouse so that they know, Hey look, I’m not going to be involved in this business. I’m consenting to this buy, sell agreement. And then I agree to sell the shares, uh, to the corresponding a company or to the partners as however the buy sell agreement is labeled. And then going back to disability, Trust Attorney Las Vegas uh, same thing. You want to have it laid out. You know, if a partner becomes disabled, can they still get profits? They’re just not involved in the day to day or you know, do they have to sell their shares at that point? And then same thing, the terms, you know, what’s that bio look like, what’s, um, you know, how’s that funded, what’s the terms, all those things.
And then other thing, um, you want to consider is, um, is any, any, any other terms? Like, if a partner leaves early, wants to get out in the first five years, do you want to incentivize them to stay in the business, stay involved and get it growing? Uh, you could put a term in there that if they want to sell within the first five years, then they have to, uh, they get a discount, um, on the, the value of, of their shares. So the remaining partners get to take, knock off 20%, 30%. Even I’ve seen 80% off the value of the company. Uh, if that person sells their shares to help motivate them to stay in the company, you also usually want to put in there a first right of refusal so that the partners get the first chance to buy the shares or the interest in the company from the person who wants to sell.
Um, instead of having them be an outside party. And once again, if you have that discount, then obviously it makes it a better deal for them to do that. So those are some basic terms to consider with your buy sell agreement. Uh, once again, you know, having a qualified, uh, attorney draft that is definitely keyed and this is not something you want to do on your own. And, um, you know, typically we advise each, um, each party to have their own attorney review it so that way, you know, cause the, the person who’s drafting it is representing either one of the partners or the company itself Trust Attorney Las Vegas. And so the individual partners need to get their own counsel at that point to the, to make sure that everybody’s in agreement. And the sooner you can do this, the better, the more at an advance, you know, plan these things out when everybody’s getting along and excited and friendly as much better than, you know, down the road when somebody feels like they’ve been jaded or they’ve been doing all the work or you know, there’s, there’s issues there.
It’s gonna be a lot harder to get, you know, a fair agreement signed at that point. So, plan ahead, um, review it often, you know, especially if you have it funded with life insurance, make sure you have the adequate life insurance and up the coverages necessary. And, um, yeah, that’s it for buy, sell agreements. And then lastly is, you know, Trust Attorney Las Vegas make sure the ownership of the company is owned by the trust and that you have your partners have trusts as well because you do not want to be dealing with the probate court if you, uh, if that person dies and, you know, making business decisions, having to get approval to, to continue on and do stuff other than the day to day. So that’s my advice there. Thank you for listening. As always, if you could subscribe, um, to our, our podcast, that way you get all the new content when it comes up. And then, um, you know, always check out our prior episodes if you have other questions about estate planning or um, other things that we’ve covered here. There’s a whole, um, you know, whole wide range of topics that we cover. And, uh, lastly, if you can leave us a review that way you can let us know, you know, what kind of stuff you like, you don’t like that you want us to cover in the future, we’d greatly appreciate that as well. So this is Blake Johnson. Thank you for listening.