Business Owners’ Special Series #10
Starting a business with a partner can have many advantages. Perhaps you have different backgrounds and complement each other’s strengths and weaknesses. An additional founder could mean more startup capital – more seed money from the start. Having a partner means the work and risk of running a business is shared, and does not rest solely on one person’s shoulders. But what happens when only one partner wants to exit?
Business partners starting or running businesses of all sizes benefit from buy-sell agreements for this reason and many more.
How to Incorporate a Buy-Sell Agreement in Your Business Exit Plan
Here’s a scenario BPM’s Certified Exit Planning Advisors see often. Consider a valuable co-owned business where one partner wants to retire, while the other partner wants to stay and grow the business. The retiring partner may expect the remaining partner will buy-out their share of the business at its current value. From a financial perspective, the remaining partner may not be prepared to hand over a large check. From an operational perspective, the remaining partner may not have the skillset, nor the bandwidth, to replace the retiring partner.
This may be a difficult situation, yet the scenario could be far worse. If one partner suffers a sudden death or permanent disability, there may be no time to navigate thoughtfully through the situation with that partner. The remaining partner may now be negotiating with the deceased partner’s heirs. The heirs may be less thoughtful, less patient and far less reasonable than the deceased partner would have been in this situation, leading to tough negotiations and high consultative fees.
To prevent this difficult situation with multiple owners, at a minimum, the business should have a buy-sell agreement in place. If a negotiation takes place without a buy-sell agreement, there’s strong potential for disagreement, discord and disruption, which typically has a detrimental impact on the business.
A Value Acceleration Plan Provides Fair Exit Results for Co-Owners
A well-written buy-sell agreement is one that’s implemented early in a business’ life cycle, when neither partner knows who will leave the business first. This way you are more likely agree on a buy-sell plan that’s fair for everyone. A buy-sell agreement establishes a formula or method for determining a buy-out price, so there’s little to negotiate when one partner leaves and sells their ownership interest to the remaining partner. It can include a payout plan over a specified time, making the purchase payments more palatable for the remaining partner.
In the case of death or disability, insurance can be included in the buy-sell planning, so the remaining partner may not have to fund the entire payment from company earnings or their own pocket. This allows more earnings to remain in the business for operations, and potentially to hire someone who possesses the skillsets of the departing partner.
However, a buy-sell agreement is only the beginning of effective planning. Owners should work with a Certified Exit Planning Advisor to create a Value Acceleration Plan.
A Value Acceleration Plan anticipates and plans for an effective partner buy-out scenario, makes certain the business and owners experience a smooth transition and insures successful continuity when one partner exits the business, regardless of the circumstances. Furthermore, a Value Acceleration Plan also anticipates and plans for other exit options, in the event a buy-out by the remaining partner is not the optimal solution for all stakeholders. A buy-sell agreement alone is merely a safety net, but it’s not a complete plan or solution. Here’s a few reasons why:
Example: Since a price has been pre-determined in the buy-sell agreement, the selling partner will often receive less in a sale to the remaining partner than if both partners sell the entire business together and share the proceeds. A Value Acceleration Plan is a comprehensive approach that will review all exit options and develop a strategy that helps each partner achieve their goals, while maximizing the value of the business. This includes reviewing the risks and rewards associated with each option for all partners.
Example: When a partner buy-out occurs, there’s a risk the remaining partner lacks the skills and the bandwidth to perform the functions of the retiring partner. A Value Acceleration Plan reviews the job functions of each partner, as well as key employees, and determines how to fill the gaps that might arise long before any key person resigns.
The point is life is unpredictable. Business owners should be preparing themselves, their business and their exit strategies for several different scenarios. Effective and early business exit planning will result in the most options in terms of how to exit, when to exit and how much will be received at exit. Having a Plan A, B and C will help owners be prepared for whatever life throws their way. A Value Acceleration Plan will prepare the owners and their business for each of the exit possibilities and ensure the best results for business owners.
Rich Gunn leads BPM’s Value Acceleration Service Team, which helps with succession, transition and exit planning for business owners. Rich is a Certified Exit Planning Advisor and a member of the Exit Planning Institute.
The Business Owners’ Special Series (BOSS):
The Business Owners’ Special Series (B.O.S.S.) is made up of several informational articles for business owners who are proactively seeking guidance from experts on how to implement value acceleration in their business. Be sure to keep reading, if you desire to develop your business to its maximum potential value and gain an understanding of how and why beginning the process sooner results in building greater value. Click here to read previous articles in the series.