subject: Business Succession Management - What If I Want A No-sell Buy / Sell Agreement? [print this page] There are entrepreneurs who are in business together and have firms that they need their family to continue to own regardless of if they should die. We see this with enterprises that are expected to grow noticeably. Each owner wants their family to share in the future expansion even if they should die too early.
A no-sell buy / sell agreement has a reasonably simple structure. The management and the voting stock all remain with the surviving owner. The deceased's possession interest remains with his family. We take each owner's interest in the business and divide into voting and nonvoting stock. Upon the passing of one of the owners, the deceased's voting interest is purchased by the surviving owner per the conditions of the buy / sell agreement. The non-voting interest of the deceased owner remains with his family. This way, if the business does grow seriously, the family of the deceased will share in the growth. The control over the business remains in the hands of the surviving owner. The family of the deceased 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 talk with their accountant and attorney 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 promote that each entrepreneur purchase life assurance on their lonesome lives equal to their business value. This policy will provide funds for their family on their death, guaranteeing their monetary security until the business is sold. Under the buy / sell agreement, the business owners consent to buy each other's voting interest for a nominal sum. This can be funded with terribly cheap term insurance.
This is a brilliant arrangement when the owners are family members such as siblings. It is an appropriate option when the business is in the growth stage and is involved in technology or a revolution where there will be heavy growth. We have also done this number of times on real-estate transactions where the ultimate value of the property will be worth many times its value today.
There is nevertheless a drawback to this arrangement. The surviving owner is going to have to continue to run the business, grow the business and assume all of the responsibility, knowing 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 important to recollect that we do not have a crystal ball and have no way of foretelling the future. Many years ago, I came up with a no-sell buy / sell arrangements for three siblings. The little brother was 54 and the 2 older siblings 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 brothers who would definitely die before him. It looked prejudiced to him that he'd have to share the sale proceeds with his brother's families. As fate would have it, he expired from cancer eighteen months later on. The older brothers went on to work another 15 years. The business was worth roughly $2 million at the time of the death of the little brother. When the surviving bros sold the business 15 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 example.
