Buy-Sell Agreements in Florida are a critical part of a Florida business succession plan AND this is a key part of your Florida estate plan if you own or operate a business in Florida or hold Florida real estate.
However, even when folks do some business planning, they sometimes neglect the key component of preparing an effective “buy-sell” agreement.
Florida Business Succession Planning with Buy-Sell Agreements
A buy-sell agreement is NOT a purchase agreement for the sale of the business in a traditional sense. It is a part of your Florida estate planning documents that establishes the terms of a business buyout in advance.
A buy-sell agreement is the strongest way to define how the transfer of business interest will occur in the event of the death or disability; however, it should include the following key provisions in order to avoid confusion and legal challenges.
Buy-sell agreements in Florida should specify whether the agreement is a “cross purchase” or an “entity purchase”.
There is a big difference between an entity purchase verses a cross purchase strategy. The former strategy provides for the “company” to purchase the defunct partner’s business interest and the latter strategy provides for the other partner/s to purchase the defunct partner’s business interest. So the decision for the business planner is whether it better serves the business to have the company repurchase the interest or whether the other partner/s should end up with it. This decision is about who controls the former partners shares or membership interest. Also, if life insurance, or key person insurance, is funding the purchase of the partner’s interest, then the question of who is the beneficiary of the policy becomes important.
Buy-sell agreements in Florida should specify how the business will be valued.
This is a likely problem area and an easy area to get wrong because many of the boilerplate documents simply state that the business will be appraised. The appraisal approach may be problematic because professional business appraisals are expensive and this can lead to conflicts such as who pays the cost.
Another problem is about what happens if the parties disagree with the appraiser’s valuation. Another option, is to say that a business broker who preferably sells businesses in the same industry on a regular basis will evaluate the business. Although this option is less expensive, the same problem can arise if the parties disagree with the broker’s evaluation.
A third option is to include a clear formula for valuing the business interest. The advantages to the formula approach is it can be specifically agreed upon by the partners in advance and can be very specific. For example, a valuation formula might be 3 x annual earnings after expenses and debt service + the wholesale value of inventory, fixtures and equipment. Of course, the final value will be based upon the percentage of interest owned by that partner.
For these reasons, a formula approach may be preferable and remember that the appraisal or broker valuation approaches may also be used as a backup if there is a dispute for as a second opinion approach. Another key concern is making sure that there is life insurance coverage for the business (or the owners individually) and that the coverage reflects the approximate buyout value of the business. This coverage should be regularly audited to keep pace with business growth and other market valuation changes. An appropriate life insurance strategy for business continuity succession planning should be part of any plan involving buy-sell agreements in Florida or other states.
While it is possible to include business succession provisions in a partnership or Florida operating agreement, a separate buy-sell agreement is a stronger way to spell out what happens if a business partner can no longer serve the company due to death, disability or another major life event.
A separate buy-sell agreement is preferable, as opposed to inserting the buy-sell provisions into an operating agreement, shareholders agreement or partnership agreement. The reason that a buy-sell is preferable as a stand alone document is that it is for the specific purpose of coordinating the sale of business interest if a life event occurs and knowing this can eliminate a lot of confusion.
Finally, it is important to reference your business continuity succession plan in your other key Florida estate documents such as your Florida last will and testament and your Florida revocable living trust.
Situations involving the death or disability of a partner (especially a family member in a family business) can be traumatic, so in my experience, anything to lessen the chance of confusion is worthwhile. This is why the key is always to be as clear as possible when drafting all estate planning documents, and business buy-sell agreements are no exception.