subject: Business Succession Management - What If I Want A No-Sell Buy / Sell Agreement? [print this page] Business Succession Management - What If I Want A No-Sell Buy / Sell Agreement?
There are business owners who are in business together and have enterprises that they desire their family to own even if they should die. We see this with companies that are predicted to grow seriously. Each owner wants their family to share in the future growth even if they should die too early.
A no-sell buy / sell agreement has a reasonably easy structure. The management and the voting stock all remain with the surviving owner. The deceased's possession interest remains with his folks. We take each owner's interest in the business and divide into voting and nonvoting stock. Upon the demise of one of the owners, the deceased's voting interest is acquired by the surviving owner per the conditions of the buy / sell agreement. The non-voting interest of the dead owner remains with his family. This way, if the business does grow noticeably, the family of the deceased will share in the expansion. The control over the business remains in the hands of the surviving owner. The family of the dead owner has non-voting interest in the business only and cannot expect to see any cash out of the deal unless, and until, the business is sold.
The business owner should consult with their accountant and solicitor before entering into a no-sell buy / sell agreement. When the business is recapitalized into voting and non-voting shares, each owner receives one voting share and ninety nine non-voting shares. We recommend that each entrepreneur purchase life assurance on their lonesome lives equivalent to their business value. This policy will supply funds for their family upon their death, guaranteeing their financial security till the business is sold. Under the buy / sell agreement, the business owners consent to buy each other's voting interest for an insignificant sum. This can be financed with very inexpensive term insurance.
This is an excellent arrangement when the owners are family members like brothers. It's an acceptable option when the business is in the growth stage and is concerned in technology or an innovation where there will be heavy growth. We have also done this many times on property transactions where the final price of the real estate will be worth many times its price today.
There is however , a downside to this arrangement. The surviving owner is going to need to continue to run the company, grow the business and presume all the liability, realizing that they may only realize their portion of the worth in the case of a sale. The family of the deceased owner ( s ) will be receiving the leftover portions.
It is vital to remember that we don't have a crystal ball and have no method of predicting the future. Many years back, I drew up a no-sell buy / sell agreements for three siblings. The youngest brother was 54 and the two older bros were sixty and 63. The 54-year-old was sure that he would be the last to die and lamented how he would have to work harder and longer than his bros who would definitely die before him. It looked prejudiced to him that he would have to share the sale proceeds with his brother's families. As fate would have it, he died of cancer 18 months later on. The older siblings went on to work another 15 years. The business was worth roughly $2 million at the time of the demise of the little brother. When the surviving brothers sold the business fifteen years later, the sale price was $15 million. The deceased brother's family received about $5 million. The no-sell buy / sell worked well in this case.
