BUY- SELL FINANCING True or false: Most family business owners want their businesses to be liquidated when they retire, become disabled or die. If you answered false, then you are correct. In this article, we will survey the fundamental key to the survival of a family business - a Buy- Sell Agreement ( BSA). Introduction A BSA is a lifetime contract providing for the transfer of a business interest upon the occurrence of one or more triggering events as defined in the contract itself. For example, common triggering events include the retirement, disability or death of the business owner. An interest in any form of business entity can be transferred under a BSA, to include a corporation, a partnership or a limited liability company. Also, a BSA is effective whether the business has one owner or multiple owners. As a contract, a BSA is binding on third parties such as the estate representatives and heirs of the business owner. This feature can be invaluable when the business owner wants to ensure a smooth transition of complete control and ownership to the party that will keep the business going. Subject to certain Family Attribution Rules under Internal Revenue Code § 318, a BSA can help establish a value for the business that is binding on the IRS for federal estate tax purposes as provided under Internal Revenue Code § 2703. Three Flavors A BSA is commonly structured in one of three general formats: an Entity BSA, a Cross- Purchase BSA and a Wait- And- See BSA. Under an Entity BSA, the business entity itself agrees to purchase the interest of a business owner. Conversely, under a Cross- Purchase BSA, the business owners agree to purchase one another's interests. The Wait- And- See BSA gives the entity a first option to purchase the interest before the remaining business owner( s). In addition to these three general formats, a One- Way BSA may be used when there is one business owner and the purchaser is a third party. The selection of the appropriate BSA format is critical for a variety of tax and non- tax reasons beyond the scope of this discussion. However, no BSA is complete without a proper funding plan. Like a beautiful automobile without fuel in the tank, a BSA without cash to fund the purchase is going nowhere. Funding Options Some common options to fund the purchase obligation under a BSA include the use of personal funds, creating a sinking fund in the business itself, borrowing funds, installment payments and insurance. Of these options, only the insured option can guarantee complete financing of the purchase from the beginning. Accordingly, a proper BSA will include both disability buy- out insurance and life insurance. Since the health of the business owner determines their insurability, any delay in acquiring appropriate coverage could be fatal to the success of the BSA and, with it, the survival of the business itself.

Note: Nothing in this publication is intended or written to be used, and cannot be used by any person for the purpose of avoiding tax penalties regarding any transactions or matters addressed herein. You should always seek advice from independent tax advisors regarding the same. [ See IRS Circular 230.] © 2010 Integrity Marketing Solutions Scott N. Alperin Alperin Law 4605 Pembroke Lake Circle Suite 300 Virginia Beach, VA 23455 Phone: ( 757) 490- 3500 Fax: ( 757) 233- 3600 scott@ alperinlaw. com Scott N. Alperin Alperin Law Phone: ( 757) 490- 3500 . Web: www. alperinlaw. com We are a full- service estate planning, business law and real estate law office working to provide Peace of Mind to our clients and their families. We are committed to personal service to each client, using only those legal tools and techniques that suit the individual client's needs, goals and personal situation. Services provided include: Revocable Living Trusts . Wills . Powers of Attorney Irrevocable Living Trusts . Life insurance Trusts Integrated Estate Planning . Real Estate . Tax Deferred Exchanges Tax Planning Strategies . Business Law Family Limited Partnerships . Limited liability Companies Corporations . Non- Profit Organizations . Asset Protection If you would like a friend or client to receive our newsletter free of charge, please call our office with their name and email address. Visit us online at www. alperinlaw. com for more information. Scott N. Alperin . Alperin Law 4605 Pembroke Lake Circle . Suite 300 Virginia Beach, VA 23455 If you're a small business owner or are involved in a family- owned business, you already know how challenging it can be to make time to work on your business rather than just focusing on the day to day operations in the business. As this month's newsletter addresses, failure to properly plan for the future of your business almost guarantees that the business will not survive the owner's death or disability. If that happens, everything you've worked so hard to develop and grow can evaporate in an instant if you die or become disabled. Statistics show that the large majority of all small family- owned businesses aren't sold for their true value and don't survive transfer to the next generation. However, there are a variety of planning techniques you can take advantage of to avoid having your business go up in smoke in the event of a catastrophe. At Alperin Law, we would be happy to work with you to design and implement a business succession plan that is tailored to the unique attributes of your small business. Just give us a call to start the process. We welcome your questions and comments. Please let us know if there is anyone you would like us to add to our Estate Planning Matters mailing list. Scott N. Alperin