Learn Another Way to Exit Your Business With a “Wait and See” Buy-Sell Agreement
“Wait and See” Buy-Sell Agreements Offer Maximum Security and Flexibility to Small Business Shareholders
The “wait and see” agreement is a hybrid buy-sell agreement, combining elements of both the “stockholder redemption” agreement and the “cross purchase” agreement. These agreements give remaining shareholders flexibility in determining how a departing members shares will be divided. The wait and see agreement allows shareholders and small businesses to wait until a departing shareholder leaves the company to determine how their shares should be divided, while predetermining a price that all parties agree to when the agreement is made. This guarantees a buyer for the shares and avoids disputes related to compensation that the departing shareholder will receive.
Depending on how they are constructed, wait and see agreements can give a purchase option to the remaining shareholders, allowing them to buy the departing members’ shares themselves if they choose, but also allowing them to decline and have the business itself buy the departing members’ shares. These agreements can also give the business itself the first option to purchase the shares. If shareholders purchase the stock personally, they will increase their ownership stake in the business. If the company purchases the shares, then each remaining shareholder will continue to own a proportionate number of shares in the business.
Wait and see agreements are beneficial for several reasons. For the departing shareholder, they offer the security of knowing there will be a buyer for their shares and arguments over price will not be an issue. The agreements also offer flexibility for the remaining shareholders, allowing them to decide whether they want to buy the shares themselves and increase their ownership in the business or simply allow the business to buy the stock. Wait and see agreements also give the remaining shareholders the security of knowing that an unwanted third party will not buy the shares and gain an ownership stake in the business.
As with all buy-sell agreements, wait and see agreements can establish a predetermined business value, which is beneficial for tax purposes for businesses that are likely to increase in value. However, for the government to honor such a predetermined value, three strict conditions must be met:
- The agreement must be a bonafide business agreement.
- The agreement must be clearly not a device to transfer the business to members of a decedent’s family for less than full and adequate consideration.
- The terms of the agreement must be comparable to similar arrangements entered into by non-parties.
These conditions prevent partners/shareholders from using buy-sell agreements as a way to transfer business ownership to family members while avoiding paying a gift tax.
Wait and see agreements can be constructed in many ways. It is important to see an experienced business law attorney who has dealt with them before, since there is no “set in stone” way of how the agreements must be constructed. A knowledgeable business law attorney will be able to walk you through the many options and implications that may arise with the different approaches to constructing a wait and see buy-sell agreement.
Fredrick P. Niemann, Esq. has over 30 years of experience as a business law attorney. He has constructed various types of buy-sell agreements for all types of businesses. If you have any questions relating to a buy-sell agreement or your business, please give him a call toll-free at (855) 376-5291 or email him at firstname.lastname@example.org. He welcomes your inquiries and will meet with you to explain your options.
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey Business Law Attorney