Generational Transition Program

Buy-Sell Agreement: A Useful Transition Legal Tool

published: Tuesday, August 27, 2019

Buy-Sell Agreement: A Useful Transition Legal Tool

A buy-sell agreement can be a useful legal tool when planning your ranch transition.  This agreement addresses what happens when one or more of the owners dies, retires, becomes incapacitated or wants out of the business.  Benefits may extend beyond the business and into family relationships.

Joe Hawbaker of Hawbaker Law Office in Omaha, Nebraska has written several articles housed at https://farmerandrancher.org/articles/ . “Buy-Sell Agreement” is a legal tool for family ranches (and businesses) transitions. 

*These articles are for information purposes only and do not constitute legal advice nor are a substitute for legal advice.*

View the full article here.  A summary of the article is below.

First, Hawbaker explains buy-sell agreements are for co-owners of a family business.  These closely-held businesses are owned by a few people and ownership interest are seldom bought and sold.  Many entities used in ranch transition would qualify, such as a limited liability company (LLC) or corporation.

There are three types of buy-sell agreements.

  1. A Redemption Agreement.  The company itself (the LLC or corporation, in our previous example) would purchase the departing owner’s interests.
  2. Cross-Purchase Agreement.  The other owners of the company purchase the departing owner’s interests.
  3. Hybrid.  A combination of the first two types, where the company and the other owners may each buy the departing owner’s interests, but who gets the first right to buy is listed, then the next, then the next.

Several questions should be asked when setting up a buy-sell agreement:

-How does the business keep going, when departing owners are requesting major monetary payment?  What if multiple owners depart at one time?

-How do you keep outsiders from interfering with the family-run business?

-Do you need to protect the business from outside creditors (debt or divorce)?

-What triggers a buy-sell agreement?

-What is a fair price to buy out a departing owner, but keep to the business viable?  How will the price be determined and how will disputes be resolved?

-How will funding be available to purchase?  Will life insurance be used, or can the buyer qualify for loans from a bank?  Many ranches transition when the children are 65 years old- taking on extreme debt at that age may be more difficult then a 35-year old.

-Taxes, the dreaded taxes.  Is there tax consequences from a buy-sell agreement?

 

Buy-sell agreements can be a useful legal tool, especially if families are concerned with fairness of those working in the business versus those who are not, “keeping the ranch together” and not broke up and sold, and creating limited opportunity to sell for those wanting out of the business.  “A good buy-sell agreement may not only protect the family farm or ranch, but the relationships in the family that owns it,” states Hawbaker.

*These articles are for information purposes only and do not constitute legal advice nor are a substitute for legal advice.*  The full article can be found at https://farmerandrancher.files.wordpress.com/2015/03/buy-sell-agreements.pdf

 

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