buy sell agreements for agent use only not for distribution to the public buy / sell agreements

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Buy / Sell

Agreements

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Buy / Sell Agreements in Perspective

Role of Business Advisor:

To assist and advise the company on corporate and shareholder

planning.

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Buy / Sell Agreements in PerspectiveBusiness Succession Planning• Catastrophe Planning• Exit Strategies• Retirement Forecasting• Owner Wealth Building• Shareholder Estate Planning

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Identifying the SuccessorWHO WILL OWN YOUR BUSINESS WHEN YOU RETIRE?

• Outsider– Roll-Up– Direct sale

• Insider– Co-Stockholder – Family Member– Management Team

• No one ??

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

StockholderBuy / Sell AgreementsTwo Types:• Stock Redemption

(a.k.a. Entity Purchase in non-corporate situations)

• Cross Purchase(including one-way and trusteed purchase arrangements)

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Stock Redemption

An agreement that the Corporation itself promises to buy stock or interest of departing stockholder at a specified

price.

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Stock Redemption Characteristics• Seller will report gain equal to difference

between purchase price and cost basis

• Gain from corporation’s qualifying payments to stockholder taxed at capital gains rates

• Gain from corporation’s disqualified payments taxed as dividends (i.e., ordinary income)

• Step up in basis in death prevents gain to the estate in redemptions at a shareholder’s death.

• Not all redemptions qualify for capital gains treatment because of attribution rules

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

When to Use Stock Redemption

• When you have many stockholders• When a stockholder’s interest is small• When equitable allocation of cost of

the financing vehicle is of concern

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Stock Redemption Financing

• Financed with corporate owned life insurance policy or sinking fund

• Policy premiums and other payments are non-deductible

• In the event of death, proceeds are income tax free to company and paid to the estate of departed stockholder

• C-Corp AMT; No basis increase

• S-Corp no AMT; pro-rata basis increase when proceeds paid to a corporation

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Buy / Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Stock Redemption Example

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Stock Redemption Example

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Cross Purchase

An agreement among stockholders (interest holders) that the survivors

among them will buy the interest of the departing stockholder at an agreed

price.

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Cross Purchase Characteristics

• The agreement specifies how much each survivor buys from the departing stockholder. It also may specify changes in ownership ratios.

• In post-death purchase no gain to the estate

• In lifetime sale, seller’s capital gain equal to fair market value less basis

• Easier where there are fewer stockholders

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Cross Purchase Financing• Each stockholder owns a life insurance

policy on each of the other stockholders (more than 2 owners, a trust or partnership arrangement is often used)

• Policy premiums are paid by owners either from dividends or increased compensation

• In the event of death, proceeds are income tax free to stockholders who buy the stock from the estate

• Premium payments less expensive if owners are in a lower tax bracket than corporation

• No AMT since policies are not corporate-owned

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Cross Purchase Example

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Cross Purchase Example

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Taxation Similarities

• C-Corporation • S-Corporation• Partnerships• LLCs, LLPs, FLPs

AMT ?No Basis Increase

No AMTPro-rata Basis Increase

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Case StudySetting Up Buy/Sell Agreement

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Case StudySCENARIO 1: Normal Stock Redemption

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Case StudySCENARIO 2: Partners A and B are in a common disaster

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Case Study HOW TO FIX?SCENARIO 3: Partners A and B are in a common disaster

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Reasons to Reevaluate Buy / Sell Agreements• Changes in the business• Change in stockholders• Changes to stockholder investment• Drafted incorrectly• Not working the way intended or

needed• Estate Planning issues

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

When trying to approach business owners for potential buy / sell sales, it is rare that you can use this as the only approach to the prospect.

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Dave Nabity’s Business Advisory Service1. Business Valuation

2. Buy / Sell Agreements & Review

3. Catastrophe Planning

4. Estate Tax Elimination Planning

5. Business Succession & Exit Study

6. ESOP Preliminary Assessment

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Dave Nabity’s Business Advisory Service7. Internal Buyout Study

8. Executive Compensation Study

9. Competitive Compensation Study

10. Retirement Plan Analysis

11. Owner / Wealth Building Study

12. Strategic Planning

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Exit Options for Stockholders• Outsider– Roll-Up– Direct sale

• Insider– Co-Stockholder – Family Member– Management Team

• Employee Stock Ownership Program (ESOP)

• No one ??

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Ancillary Sales Opportunities

FEE INCOME• Key Business

Consulting

• Estate Planning

• Nonqualified Plans

• Investment Management

• Executive Compensation

• Strategic Planning

COMMISSION INCOME

• Nonqualified Plans

• Qualified Plans

• Investment Management

• Executive Compensation

Buy Sell Agreements

For Agent Use Only—Not for Distribution to the Public

Advanced Marketing SupportContact one of our Advanced

Marketing Attorney’s at

(800) 223-9989 *G