YOUR BUSINESS IS DOING WELL BUT WHAT’S IT WORTH?

Owning a small business is tough. I know. I own a small business – my law practice. But once you get your business off the ground, what is it worth? If two or more people own the business, you better know the answer to that question before one of the owners dies or leaves the business.

Often, people will partner-up when starting a business. Two people who worked together at a bigger company or two friends might decide to go into business together – to share the expenses, the work (hopefully they’ll have work to do), and, eventually, the profits. After all, the goal of any business is to make a profit, to turn the business into something that is worth something. (Unless, of course, you’re a non-profit organization, but let’s forget about those for the moment.)

But let’s assume that you and your friend started your business. You open up in your garage and now, ten years later, you have fifteen employees and you own a building. The company is doing nicely. You no longer worry about meeting the monthly bills – at least not every second of the day.

You’re older now, too. Not old, but older. You have a wife or husband and two children. Your focus in life has shifted a bit. You still worry about the business and you still think about being the next Bill Gates (every now and then), but you have more realistic concerns, too.

You worry that your family will be well taken care of if you were to die. You begin to wonder what would happen with the business or, more succinctly, what would happen to your share of the business if you were to die.

When you and your friend started the business, you didn’t bother to put anything down in writing. Or maybe the only thing you have in writing is a “corporate kit.” A corporate kit is a binder that a lawyer or a company may have provided you when you used their services to incorporate your business. It contains the “certificate of incorporation,” some bland stock certificates, and several other documents.

But none of the documents that you have address the issue of what happens when one of you die. If you don’t have an agreement that addresses this issue, your family could be in for a ride if you were to die.

Unquestionably, when you die, your interest in the business will pass to your family. If you own an interest in a partnership (a partnership is formed whenever two people agree to do business together), then that interest will pass to your family. If you incorporated when you started your business, your stock in the company will pass to your family.

But the real question is, what are these interests worth? Absent an agreement between the owners of the business, the answer might be “not much.”

Most small businesses are highly dependent on the owners, or maybe even one of the owners. These individuals are known as “key people.” Without them, the business isn’t worth much, or anything.

Furthermore, there is no market on which to sell an interest in a small business. Stock of large corporations is often traded on public exchanges – the New York Stock Exchange, for instance. But there is no ready market for stock in a small business. The family might own 50% of the stock, but where are they going to sell it?

The corporate by-laws might prevent the family from selling the stock. Even if they could sell it, who’s going to want to buy it and go into business with another individual who may or may not want to be in business with the new owner? And, what if the surviving partner simply attempts to take the customers and run, open up a new business of his own?

All of these problems can be addressed if the owners have a Buy-Sell Agreement. A Buy-Sell Agreement is an agreement that establishes a price for an interest in a business between the owners of the business and establishes the terms and conditions under which each owner would buy the other owners out under certain circumstances.

For instance, a Buy-Sell sets a price for the business if one owner dies, files for bankruptcy, or voluntarily leaves the business. The Agreement establishes the manner in which either the business or the other owners will buy-out the deceased or departing owner – e.g., immediate receipt of money or a ten-year note with monthly payments.

The Agreement compels the family of a deceased owner or a departing owner to sell his interest in the business to the company or the other owners if a selling event occurs.

In short, a Buy-Sell Agreement solves problems at the best possible time, before the problems occur. Most business owners don’t think of such things when they’re struggling to start a business and earn some money. But they should think about it when they’ve established their business somewhat.

A well-drafted buy-sell agreement helps ensure that ownership transitions occur according to your wishes rather than by default under state law. Planning ahead can protect the business, provide certainty for owners and their families, and reduce the likelihood of future disputes.