Succession planning for your business – buy-sell agreements explained
Succession planning can get extremely complicated if you don’t have any knowledge in the field of taxes. When owning a business, you must stay up to date with the latest innovations that could make your tasks easier or at least find a team of accounting specialists that could give you advice and support to complete these. Luckily, this article will explain the basic notions related to buy-sell agreements as a part of succession planning. Transferring a business to family members at its full value can be tricky, so that’s why you must learn how to do your succession planning so that the value of the business remains intact. In the event of a business owner’s death, succession planning will ensure the continuity of that company in later years. In case you believe you can’t handle this task, visit https://mraadvisory.com/ and the professional accountants there can do it for you. Here’s the information you are interested in:
Types of buy-sell agreements and how they work
There are three main types of buy-sell agreements, and business owners must choose the one that fits their needs the best. The first type is called cross-purchase. Such agreements is held between two different people, one of which is the owner of a company, who decide to purchase their share of business in the eventuality of the owner’s death. The benefit of cross-purchase agreements is that the tax basis is convenient and advantageous. The second type of buy-sell agreement is stock redemption. The company will buy all the owner’s shares, which means that no step up for the shares is acquired. Finally, hybrid buy-sell agreements include elements from cross-purchase and stock redemption, meaning that it might be the best choice for some companies.
It’s important to understand that each situation has particularities that must be taken into account before selecting the appropriate buy-sell agreement, which means that the company must be thoroughly analyzed, as well as its value and current state. Professionals might do that better and more careful than you do, so don’t hesitate to ask for help with your succession planning.
Reasons why you should establish a buy-sell agreement early
Set your objectives quickly and deal with succession planning long before an unfortunate event can happen. Establishing a good mechanism to set the selling price of the interests is an absolute must to keep the value of the business untouched in the process. Also, buy-sell agreements can provide a market for an illiquid asset.The founder of the business is able to decide from the very beginning who would be capable of handling the business and maintain it in control just as good as he does. Structuring buy-sell agreements will reduce the chances that the business won’t be managed the same by another potential owner. From an economical standpoint, there’s no doubt that buy-sell agreements help the business. If the other person who takes part of the agreement is active in business, a properly structured succession plan will lead to the progression of the company in future years.