Every day, it happens to somebody in the green industry. Events dictate that they must leave a business that they have owned, either individually or as a part of some form of partnership. The reasons range from critical ones, such as illness, disability, divorce or other family matters to a desire for a change of vocation or location. Oftentimes, it may triggered by the simple fact that partners, for whatever reasons, don’t want to be partners any more.
Whether or not one is the sole owner of his business or one of several partners, it is a given that one day they will want to (or need to) exit the business. That situation is usually complicated and often stressful under the best of scenarios. When the business has more than one owner, the issues multiply.
While business partnerships are very common, partners may have very different personal situations and perspectives which may make planning for the exit of one partner very difficult.
Several questions come to mind:
- If one partner wants to or needs to leave the business, will the remaining owners (or the business itself) be obligated to buy him or her out?
- If a partner does leave the business, can he or she compete against the existing business?
- How will the business be valued for the purposes of buying out a partner?
- How will the buy-out be financed? Will the partner be paid out in cash or in installments over time?
- How will the inevitable disagreements be resolved?
What if one partner believes the time is right to sell the business and another doesn’t?
These questions are best addressed when the business is formed or acquired (or when a new owner is added). An agreement among the partners covering these topics is called a “buy-sell agreement.” Even when a buy-sell agreement is already in place, it is a good idea to review where a business stands with its owners regularly and to update
the agreement based on changing circumstances. The complexity of the buy-sell agreement is likely to increase as the business is successful and grows.
It is particularly important to address how the obligations under a buy-sell agreement will be funded under various circumstances. For example, it is rather uncommon for a small business in this industry to be able to self-fund a cash buyout of a partner. In the current lending environment, it may also be very difficult to borrow the funds to buy out a partner. It is fairly common for a business to use life insurance to fund the business’s obligations under a buy-sell agreement in the event of the death of a partner. But, of course, death is only one of many situations that a buy-sell agreement must address. For example, in many cases the risk of one partner becoming disabled is far greater than dying.
The objectives of the buy-sell agreement include producing a fair result to all of the owners of the business and preserving the value of the business for its owners, both those who will remain with the business and those who will exit. Achieving those objectives requires planning on the front end. It also requires regular updates to make sure that the plan that made sense when the agreement was written still makes sense in the present and can be executed when the time comes.