Irvine, Orange County Business Law & Business Succession Planning Attorney

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Serving business owners in Irvine, Orange County and throughout southern California on various business law matters including formation, buy-sell agreements and business succession planning.

It has been estimated that more than two thirds of family owned businesses do not make it to the next generation. Why is that ? Every business needs to select and implement the structure or entity that serves its purposes best. All businesses also require systems and strategies that increase revenue and protect their hard earned assets including their employees. However, many of the businesses which then do survive the changes in the economy still fail to successfully transition to the next generation due to poor estate and tax planning.

Business Entity Formation in California

The following chart, although general, compares some characteristics of the five most commonly utilized business entities. We typically are consulted in the formation of Limited Partnerships or Limited Liability Companies because of their many advantages over the other entities and, very often, we are consulted after formation, for asset protection, incentives to employees, transfer tax, buy-sell agreements, and business sale or exit purposes.

Incentives to Key Employees

Please bear in mind that this article discusses only some of the many available incentives.

Deferred Compensation Plans

In many cases, an owner does not have an employee that they want to bring in as an owner or the employee is not ready to be an owner. The owner may, however, very much want to provide a long term performance incentive instead of ownership for a select group of management or highly compensated employees.

Stay Bonus

The purpose of this plan is to protect the owners and his/her family in the event of an untimely death. This plan provides for bonuses to employees if they remain with the company after the death rather than leaving quickly because they fear that their jobs are at risk. As a result, the company can continue and the family can find new management and/or find a buyer for the company.

Employee Ownership Agreements or Buy Back Agreements

If an owners plans to offer ownership to an employee, this can be done via a bonus of equity, a purchase or equity, or a combination of the two, called an employee ownership agreement. When an employee is a minority owner, the business owner should always be sure that there is a written agreement in case the employee leaves the company. This buy back agreement is a version of the buy sell agreement discussed below.

Buy- Sell Agreements in California

Buy-Sell Agreements are very powerful tools to control the transition of your business in the event of death, disability, voluntary or involuntary transfer of an owner’s interest or voluntary or involuntary termination of employment of an owner. Examples of transfer of an owner’s interest are through an offer to purchase from a third party, divorce, bankruptcy or court action. Examples of termination of employment could be through retirement or being fired.

Potential benefits of a Buy-Sell Agreement are to:

• Provide a ready market for the departing owner’s interest
• Set a price for the departing owner’s interest
• Establish a valuation of the business for estate tax purposes
• Can provide the buyer with a means of funding the purchase of the interest
• Establish continuation of ownership interests that is desired by owners
• Continuation of fluid management of business during transition
• Prevent attachment by ex-spouse or creditor of business owner
• Prevent delays
• Avoid disputes

Business Exit Planning

A “Buy-Sell Agreement” would only be the Contingency Plan in case of the above triggering events of a “Business Exit Plan” when a majority owner or all owners decide they would like more specific and comprehensive planning to, for example, insure the success of the sale of a business to family, employees or a third party. We feel such planning is part of a seven step process as follows:

• Step 1 – Setting Exit Objectives
• Step 2 – Determining Value/Price
• Step 3 – Preserving, Protecting and Promoting Value
• Step 4 – Converting Business Value to Cash Upon Sale to 3P
• Step 5 – Transferring the Business to Co-Owners, Employees or Family
• Step 6 – Contingency Planning for Business
• Step 7 – Wealth Preservation Planning

For more detail, please refer to Mr. Wittick’s presentation on Business Exit Planning.

Role of Life Insurance

Don’t forget that life insurance can be used as an employee incentive/benefit, as part of a business exit plan and to integrate estate planning for owners.