Up to now we’ve been discussing Buy-Sell Plans that seem to focus on corporations and partnerships, business entities that have many owners. However, we will not leave out the Sole Proprietor. The beauty of Business Succession planning is that there are always ways to draft plans that fit ALL business organizations. One plan that is well suited for the Sole Proprietor is a ONE WAY BUY-SELL AGREEMENT.
This plan functions much like other programs discussed. It guarantees a buyer and seller within a written legal agreement. However, there is a different twist on this arrangement in that the buyer is NOT a part owner in the business. In this setting, the buyer could be any one of the following. The buyer could be AN EMPLOYEE (usually referred to as a Key Person), AN INTERESTED THIRD PARTY, OR PERHAPS EVEN A COMPETITOR. Even if you are a Sole Proprietor, you could have multiple people interested in buying your business. Much like other Business Succession Plans, the One Way Buy-Sell kicks into action upon one of the following triggering events. It could be retirement, premature death, an on-going Long Term Disability, divorce, termination of employment, bankruptcy or other contingencies.
I would first like to explain the nature of the ONE WAY aspect of this transaction. Under the terms of this succession buy-sell plan, the buyer is legally obligated to BUY your interest in the business from you or your estate. Likewise, YOU or your estate is obligated to sell your interest in the business. If the buyer in this agreement dies first, you are under no obligations to buy anything from the buyer’s estate, hence the term ONE WAY.
If your BUYER is a corporation, you can insulate yourself from the risk of the buyer dying first. This can be specified in the document. There are other risks associated with this plan if your buyer is a corporate entity. Two such events may be bankruptcy or reorganization of the corporation. As with other forms, it is highly recommended that at least an INFORMAL Business Valuation be conducted to determine a fair and reasonable value of the business. Next we will discuss the particular strengths of the ONE WAY BUY-SELL.