BUSINESS TRANSITION / BUY-SELL AGREEMENT CHECKLIST
When considering selling or transferring control of your business, or even buying a business (collectively referred to below as “Business Transition”), where do you start? Speak with your attorney. The discussion with your attorney concerns the biggest or one of the biggest transitions in your life. The discussion with your attorney will help you identify your goals, needs, and level of commitment, as well as the goals and needs of the business. Talking with your attorney helps the business owner identify planning opportunities and underscores the need to minimize the risk of business disruption due to a lack of planning or maintaining your plan.
Below are twelve general areas to discuss with your attorney. It is not an all-inclusive list, but the questions will result in a good start to implementing any Business Transition.
- What is and who is the business?
What type of business do you own? What service or product does the business provide? How is the service or product marketed? Are you the sole owner of the business or are there additional owners? If so, who are the other owners of the business? What percentage of the business does each person own? Is there a written agreement or any writing describing each person’s rights and obligations regarding the business?
- Passive or active owner?
How active is each owner in the operation of the business? Who manages the business? Does your business’ management include non-owners? Do all owners want to be active in management? Is there a written plan in place to help the continuity of management during a Business Transition? Will the current owner maintain control of the business even after the ownership is transferred?
- What about employee issues?
How will the business retain its key employees, even though those employees are not owners? Employment issues can include compensation, non-competition agreements, non-disclosure agreements, non-solicitation agreements, and protecting intangible assets such as copyrights, patents, exclusive territory agreements, or franchise agreements. Do the key employees have stock options that may be converted to an ownership interest in the business?
Are there alternative dispute resolution provisions in place for resolving disputes between business owners? Is there a possibility of a deadlock between owners, e.g. a fifty–fifty ownership where the two owners are evenly divided on an important decision?
- Trigger events?
What, if anything, triggers a buyout of an owner’s interest? Is it an owner’s death, disability, retirement, termination of employment, sale to a non-owner that gives the right of first refusal to the other non-owners, divorce, or deadlock with the other owners?
- If one of the triggering events happens, is a Business Transition mandatory or optional?
How will the value of the ownership interest be determined? Is it predetermined, determined by an agreed formula or determined by a licensed, professional appraiser?
- Will the Business Transition be an arm’s length transaction or a gift?
If a family member will receive the ownership interest, is the interest to be part of a gifting program?
- When is the trigger pulled?
If a trigger event happens, is payment made for the departing owner’s interest in one-lump sum or in installments over an agreed timeline? If payment will be over time, what are the terms of the installment loan? What is the down payment, the interest rate, and the time allowed for full payment? Is the loan secured? How is payment funded? Will life insurance proceeds fund all or part of the purchase price? Who are the owners of the life insurance policies? Who are the beneficiaries?
- What are the tax consequences?
Does the Business Transition cause gift tax or estate tax consequences, or both? Will there be a step-up in basis to consider? What is the tax basis? Will the net proceeds from the sale be subject to capital gain or ordinary income tax? Is the sale of your business an asset sale or the sale of the entire business? Is the business taxed as a corporation, even if it operates as a limited liability company? Do the owners know an ownership interest in a business taxed as an S corporation cannot be transferred to a party not qualified to own S corporation stock?
- New owner restrictions?
Are there professional licensing rules that will apply concerning who qualifies as an owner of a state regulated professional service business? Are there restrictions that require the approval of the other owners? Are there preapproved types of transfers? (Examples of preapproved transfers for parties to acquire an ownership interest in the business could include designated family members or a revocable trust.) Are there restrictions on adding a shareholder or member to the business? Does the restriction continue with a new owner until the transferred ownership is paid in full? If there are minority interest owners, what are the protections built into the parties’ agreement to protect minority owners if the majority owner wants to sell to a third party?
- Family considerations?
How will the family be affected by a Business Transition? Do some of the family members think the Business Transition is premature or do they feel they have no input in the decision making process?
- What do you want to see after the Business Transition is completed?
Will you stay for a stated time period to provide guidance to the new owner? Is that part of the consideration in the Business Transition? If so, will you be an unpaid consultant, a paid employee or an independent contractor? Must you maintain regular office or work hours or only have to make yourself available as requested?
When you are receptive to having a discussion with an attorney about the transfer of control or the sale of your business, contact us at 813-852-6500 to arrange for a free 30 minute consultation. The business attorneys at Stross Law Firm, P.A. have over 40 years of experience in various types of law including business law and buying and selling of businesses.