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 that combines elements of both the “stockholder redemption” and “cross purchase” agreements. These agreements give remaining shareholders flexibility in determining how to divide a departing member’s shares. 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 over the compensation the departing shareholder will receive.
Depending on how they are structured, wait-and-see agreements can give the remaining shareholders a purchase option, allowing them to buy the departing members’ shares themselves if they choose, or to decline and have the business itself buy them. These agreements can also give the business itself the option to purchase the shares first. If shareholders purchase the stock personally, they will increase their ownership stake in the business. If the company purchases the shares, each remaining shareholder will continue to own a proportionate share of 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 reassurance 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 bona fide 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 to transfer business ownership to family members without paying 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 to construct the agreements. 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.
Fredrick P. Niemann, Esq. has over 30 years of experience as a business law attorney. He has drafted various types of buy-sell agreements for businesses of all sizes. If you have any questions relating to a buy-sell agreement or your business, please give him a call at (732) 863-9900 or email him at fniemann@hnlawfirm.com. 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