In closing our discussion of the One Way Buy-Sell, keep in mind that this agreement is most suited for a sole proprietor. It also carries with it some of the strengths of the other forms of Business Succession planning. Namely, it guarantees a buyer and seller for the business, sets a documented fixed value for the business, increases the creditworthiness of your enterprise, and can often help maintain the stabillity of the business. However, the sole proprietor form of business organization is UNINCORPORATED and this takes additional considerations.
Under the law, your unincorporated sole proprietorship terminates at your death. At this time your business and personal assets are collected and distributed to your heirs. The liquidation of business assets could result in a much LOWER valuation for distribution to your heirs than if it were sold as an on-going concern. This means that as a Sole Proprietor you can enter into a ONE WAY BUY-SELL with any willing buyer and as such could ensure that the sale of your business would occur at a much higher valuation than if it were sold as an individual asset. Keep in mind that UNLIKE a partnership or corporation, the assets of a proprietorship are not legally seperate from ones’ personal assets. Thus, it is incumbant of the sole properietor to sepcify which assets are to be sold as business assets.
Another important point to keep in mind is that RESTRICTIONS could limit the effectiveness of your ONE WAY BUY-SELL. Specifically some factors could come into play such as FIRST OFFER PROVISIONS OR RIGHTS OF REFUSAL CONTINGENCIES. Such restrictions could limit your access to outside credit. This means that any such provisions in a ONE WAY BUY-SELL may prevent you from pledging your own interest in the business as collateral for outside credit. Without the ability to pledge your business interest, the lender could turn you down. As with other types of Business Succession agreements, there are ways to circumvent such limitations. This is why it’s imperative to have an Attorney and a financial planner assist you in this vital area.
One key component of the ONE WAY BUY-SELL is that of the KEY PERSON. Not only does it reasonably help to inflate the value of the business but it also adds a very favorable factor in completing the Buy-Sell agreement. Who knows, the KEY INDIVIDUAL could well turn out to be the new owner. In the next few articles we will offer some suggestions about planning for the KEY PERSON.