Many business owners have a buy-sell arrangement set up for the future. It’s helpful to draw out these directions in advance, especially when there is the potential that future owners or part-owners might get gridlocked with one another. In these situations, buy-sell directions can help disputing parties move forward.
It’s possible that you’ve already heard about a shotgun buy-sell arrangement, but a quick draw agreement is a bit different. Under a shotgun, the offering individual stipulates a price. The offerree then has the option to buy those shares or to sell their own shares to the offeror. The exact timing isn’t a major issue in this situation, since the offeree retains the option to either buy or sell. In some ways, this can even be seen as a disincentive to pull the trigger.
All that changes under a quick draw arrangement. Under a quick draw, either side can provide a notice to purchase the other’s shares at a price that is determined through an appraisal process. This can happen after a contractually defined “trigger event”, but the timing of the trigger pull is essential in quick draw. Simply put, timing is everything.
Under quick draw, buyer and seller designation is determined simply by who submits their notice to purchase the other’s shares first. A difference of even just minutes can determine who gets to buy and who gets to sell. This complex process was recently held up in Mintz v Pazer, in which the judge supported this out of the box buy-sell arrangement.
If you’d like to learn more about your buy-sell options and put a plan for the future in motion today, reach out to us at 732-521-9455 or email us at firstname.lastname@example.org
While “now” is always the time you should start getting your exit plan ready for your business, there are some guidelines about specific year marks that you should use to think about what will happen next. Here is the best advice for exit plans.
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Starting ten years in advance is the best way to maximize opportunities. This is because at this marker, you can start really considering whether the business is intended as a family legacy. If a family member will be taking over the business, the ten year period is a great planning point for incorporating those family members into training and education. Ultimately, this will make the transition period much smoother. Saving taxes is another primary concern at this stage. If a business owner has recently converted the company from C Corp to S Corp filing status, you should wait a minimum of ten years before selling the company.
Five years out is a good place to review because you are a little closer to the finish line here. Cash flow, tax deduction, and tax leverage should all be explored with your planning specialist at this time. Changes regarding cash flow can allow for a strategy in which cash flow to the owner is a focus rather than company growth.
Finally, even one year out provides planning opportunities. For example, we have implemented strategies which could save the Seller the entire [9% – 13%] tax some states collect upon the sale of a business. If the company will be sold, the owner should identify a business broker or investment banker to actually put the business on the market. This gives enough time for a due diligence review, drafting the sales agreement, and delays related to regulatory issues. No matter what stage you’re at, you need to put some planning tactics in place for your exit plan. Contact us today at 732-521-9455 or email email@example.com to get started with your personalized plan.