Preface: Partnerships require courage, collaboration, trust, risk and effort. These business pillars lead to a long and successful business relationship, e.g. partnership.
Credit: Donald J. Sauder, CPA, CVA
Partnership Buy-Sell Agreements
Let’s say you get along well with your boss, and you like the idea of share driving responsibility, and you want to drive the bus. Great! Then be certain to compose an articulate buy-sell agreement. A buy-sell agreement is a necessary legal document for any business with multiple owners. The cost and time to compose a buy-sell is miniscule compared to the benefits incorporated. A buy-sell agreement can help peacefully resolve family business disputes resulting from values-based or relational conflicts that require a change in ownership. It can help keep a business flourishing and help avoid liquidity or goodwill problems that arise during partnership conflicts, with a limit on the intensity of the conflict.
Buy-sell agreements can be either cross-purchases or redemptions say. A cross-purchase permits another partner to purchase the business interest while a redemption permits the business partnership to purchase the interest. In a partnership, these purchases have specific tax rules applicable with a IRC 754 step-up with either a Section 743 or Section 734 partnership tax basis adjustment.
A buy-sell agreement can result in automatic and involuntary sales of a partnership business interest, even at a specific price, should certain events occur, e.g. disability or death. It can also specify valuation metrics and sale parameters should a partner want to voluntary egress ownership, e.g. new opportunities, relocation, etc. Some businesses have specific rules that prevent business interests from being entangled in certain disputes with proactive involuntary rules of sales written in the buy-sell agreement.
A buy-sell agreement for a business should be composed with a business or tax attorney and your trusted advisors, e.g. accountant, to appropriately protect your business value should an activation of the agreement be necessary. A buy-sell agreement should include an umbrella of applicability, i.e. terms of who is bound by it and how it can be revised. It should include a metric for determining the price of buyout and timing of the payout, along with necessary funding rules. Applicable loans or security and collateral of the payout should also be addressed. Finally, rules of not-to-compete should not be omitted. In addition, transfers to owners trusts or estates and spousal involvement in ownership are pertinent, along with family transfers to children.
If you decide to enter a partnership, you should also write a business partnership values constitution. Easier said, harder to do. The partnership values constitution should outline what you “rules” you will govern the partnership with, and address the treatment of problems that could derail the partnership, mitigation of those problems. A partnership values constitution requires the hard discussions beforehand, well in advance of the day you sign on your share on partnership ownership
Partnerships require courage. Partnerships require collaboration. Partnerships require trust. Partnership require risk. Partnership require effort.
“There are moments in our lives when we summon the courage to make choices that go against reason, that go against common sense and the wise counsel of people we trust. But we lean forward, nonetheless, because, despite all risks and rational argument, we believe that the path we are choosing is the right and best thing to do.” Starbucks CEO Howard Shultz.