Introduction
Business succession planning at various stages of a business’ growth allows a company to remain stable when crisis strikes. In a business succession plan, the owner decides who will ultimately control his or her business in the event of his or her retirement, disability or death. The owner also determines how, when and to whom the business will be transferred or sold. A sound business succession plan can also help an owner answer important questions that he or she may have not yet considered. When planning the transfer of a business an owner must also take a look at their estate plan as a whole, including tax liability and ways to pay it. Arizona business owners seeking a smooth transition of their interests should consult with a competent and experienced Arizona estate planning attorney to assist them in this matter.
An effective Arizona business succession plan should address the following topics:
- The identity of the business successor(s) managers
- The identity of the business successor(s) owners
- Treatment of the interest of a departing owner, whether the departure is due to retirement, disability or death.
By identifying permissible successor managers and owners ahead of time, an owner can simultaneously identify those who cannot be successor owners, such as creditors or other outsiders. While getting organized, selecting successors and addressing the financial well-being of a business can be easy to put off, it can really make a different in the future of a company.
Typical Documents in an Arizona Business Succession Plan
A comprehensive business succession plan usually involves:
- By-laws for a Corporation, Operating Agreement for an LLC, or a Partnership Agreement for a partnership, to establish the day-to-day management of the business and identify permissible business owners.
- Shareholder’s Agreement for a corporation, or a Member’s Agreement for an LCC to address the ownership of the business in the event of disability or death of an owner (this provision is included with the Partnership Agreement for a partnership).
- Estate planning documents of all individual owners to manage the business interest, or proceeds from the sale of business interest upon death of an owner.
It is also important to make sure that a business succession plan is current, as out-of-date plans can also cause many complications in the event of a crisis. To make sure that their business succession plan is comprehensive and updated, Arizona business owners should retain an Arizona estate planning attorney to review the documents and make any revisions if necessary.
Buy-Sell Agreements
A buy-sell agreement is a legally binding contract in which the owners of a business create the terms and conditions of a future sale, and the buy back of a departing owner’s share in the business. Buy-sells are used to control when an owner can sell their interests, who can buy an owner’s interest, and at what price.
Oftentimes, buy-sells are referred to as a prenuptial or premarital agreement among business owners or a buyout agreement. In addition, a buy-sell is a legally binding contract that can accomplish many things for businesses with two or more owners. The terms of a buy-sell agreement typically give a business entity or another owner the opportunity to purchase a departing owner’s business interest at a predetermined price. This protects the business and remaining owners from future adverse consequences, and can also minimize the possibility that the business will fall into the hands of outsiders.
Buy-sells provide many advantages for business owners, such as increasing stability for creditors, customers and employees in the event of uncertainty, and guaranteeing a buyer for a departing owner’s interest. On the other hand, if a buy-sell is drafted improperly, it can result in unintentional violations and serious problems for the business and/or owners. A Mesa AZ estate planning attorney can help Arizona business owners explore different legal and financial options to draft a well-thought out and effective business succession plan.
Call Our Arizona Estate Team at (480) 467-4325 to discuss your case today.
