Buy / Sell Agreements

1. Buy / Sell Agreements

2. Buy / Sell Agreements in Perspective Role of Business Advisor: To assist and advise the company on corporate and shareholder planning.

3. Buy / Sell Agreements in Perspective Business Succession Planning • Catastrophe Planning • Exit Strategies • Retirement Forecasting • Owner Wealth Building • Shareholder Estate Planning

4. Identifying the SuccessorWHO WILL OWN YOUR BUSINESS WHEN YOU RETIRE? • Outsider • Roll-Up • Direct sale • Insider • Co-Stockholder • Family Member • Management Team • No one ??

5. StockholderBuy / Sell Agreements Two Types: • Stock Redemption (a.k.a. Entity Purchase in non-corporate situations) • Cross Purchase (including one-way and trusteed purchase arrangements)

6. Stock Redemption An agreement that the Corporation itself promises to buy stock or interest of departing stockholder at a specified price.

7. 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

8. 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

9. 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

10. Buy / Sell Agreements Stock Redemption Example For Agent Use Only— Not for Distribution to the Public

11. Buy Sell Agreements Stock Redemption Example For Agent Use Only— Not for Distribution to the Public

12. 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.

13. 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

14. 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

15. Buy Sell Agreements Cross Purchase Example For Agent Use Only— Not for Distribution to the Public

16. Buy Sell Agreements Cross Purchase Example For Agent Use Only— Not for Distribution to the Public

17. C-Corporation S-Corporation Partnerships LLCs, LLPs, FLPs Taxation Similarities AMT ? No Basis Increase No AMT Pro-rata Basis Increase

18. Buy Sell Agreements Case Study Setting Up Buy/Sell Agreement For Agent Use Only— Not for Distribution to the Public

19. Buy Sell Agreements Case Study SCENARIO 1: Normal Stock Redemption For Agent Use Only— Not for Distribution to the Public

20. Buy Sell Agreements Case Study SCENARIO 2: Partners A and B are in a common disaster For Agent Use Only— Not for Distribution to the Public

21. Buy Sell Agreements Case Study HOW TO FIX? SCENARIO 3: Partners A and B are in a common disaster For Agent Use Only— Not for Distribution to the Public

22. 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

23. 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.

24. Dave Nabity’s Business Advisory Service 1. Business Valuation 2. Buy / Sell Agreements & Review 3. Catastrophe Planning 4. Estate Tax Elimination Planning 5. Business Succession & Exit Study 6. ESOP Preliminary Assessment

25. Dave Nabity’s Business Advisory Service 7. Internal Buyout Study 8. Executive Compensation Study 9. Competitive Compensation Study 10. Retirement Plan Analysis 11. Owner / Wealth Building Study 12. Strategic Planning

26. Exit Options for Stockholders • Outsider • Roll-Up • Direct sale • Insider • Co-Stockholder • Family Member • Management Team • Employee Stock Ownership Program (ESOP) • No one ??

27. 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 Ancillary Sales Opportunities

28. Advanced Marketing Support Contact one of our Advanced Marketing Attorney’s at (800) 223-9989 *G