For small business owners, the business itself is often the most valuable asset in
the owner’s estate. Unfortunately, statistics tell us that two out of three family-owned
businesses don’t survive the first generation.
Fifty percent of business owners plan to pass their business on to family members.
Ten percent anticipate selling to a competitor. Thirty percent plan to sell to employees
and ten percent plan to sell to outsiders.
Despite these expectations, the actual statistics show that only fifteen percent of
small businesses actually pass to the second generation; only five percent of the second
generation businesses pass on to the third generation; ten percent actually do sell to
competitors; five percent sell to employees; and, ten percent are sold to outsiders. The
balance of these businesses are closed and liquidated.
Why is it so difficult to accomplish a small business owner’s expectation of
passing the business on? There are several succession blockers that impact the ability of
an owner to pass the business on to the next generation such as:
1. unexpected death or disability resulting in loss of economic power
to continue the business and the emotion and physical drain on
surviving owners, employees and family members;
2. Conflicts among the surviving owners, employees and family
3. FAILURE TO PLAN!
When a business owner dies, the following alternatives exist:
1. liquidate the business;
2. surviving owners continue in the business with the decedent’s
3. surviving owners sell their interest to decedent’s heirs;
4. surviving owners sell their interest to outsiders; or,
5. decedent’s interest is sold to outsiders; or,
6. decedent’s interest is sold to surviving owners.
In a multi-owner business, most surviving owners prefer to purchase the
decedent’s interest and continue in the business in the event of the death of a co-owner.
If the business owners plan appropriately for the ultimate succession of the
business, they will stabilize and maximize the value of the business; transfer ownership
under controlled conditions; minimize the cost of transfer and loss. This is best
accomplished through a “buy-sell” agreement.
A buy-sell agreement allows the owners to set the value of their business or
provide a method of valuation prior to a life event that triggers the need to transfer
ownership such as in cases of death. By setting the value and putting in place triggers,
the owners can minimize the impact of the life changing event and ensure that the
business will continue to the next generation.
Buy-sell agreements are often funded with life-insurance policies so that there is
little disruption in the cash flow of the business in the event one of the triggering events
occur. This succession planning tool provides continuity that allows the business to
continue while providing value to a decedent’s family who has suffered not only the
emotional loss of their loved one but also their major income source.
In addition, a buy-sell agreement prevents disputes among surviving owners as to
what value needs to be paid for the decedent’s interest in the business and allows for the
surviving owners to continue in the business without worrying about being joint owners
with the decedent’s family.
In summary, a buy-sell agreement is a MUST business succession planning tool
as well as an estate planning tool and should be discussed with a legal and tax advisor
early on in the creation of the business and when estate planning is being contemplated.
For more information, please contact Gary Anderson, Dale Siler, Brian Cannell or
Monica Nelson Howard with the Estate and Business Planning Division of Hillyard
Anderson & Olsen, P.C.