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In the article - Planning Buy-Sell Agreements In The Hospitality Industry - by John M. Tarras, Assistant Professor, School of Hotel, Restaurant and Institutional Management at Michigan State University, the author initially observes: “The vast majority of hospitality firms (restaurants, hotels, etc.) would be considered closely-held corporations. As such, they have unique planning problems compared to large, publicly-traded hospitality firms. One area of special concern to the closely-held hospitality firm is the planning and adoption of a buy-sell agreement.”
The above thesis statement outlines the heart of the article; the buy-sell agreement in regard to smaller [closely held, as Tarras calls them] corporations.
The theory is narrow and pro-active, spanning the gap between personal-to-corporate stock manipulations.
“The primary purpose of a buy-sell agreement is to contribute to the orderly transfer of a shareholder's stock in a hospitality firm upon some future incident [typically retirement, withdrawal of a shareholder, disability, or death], as Tarras defines the concept.
“The hospitality firm or the other shareholders would be committed to purchase the departing shareholder's stock at an agreed upon price and method, and to ensure that ample cash will be obtainable for such an impending sale. The buy-sell agreement provides a market for the shareholder or the shareholder's estate for the sale of otherwise illiquid stock,” the author further provides as canons of buy-sell agreements.
In defining the buy-sell agreement with restrictive clauses, Tarras demonstrates, “…many closely-held hospitality firms desire to limit ownership to those individuals, either family or principal corporate employees, who are essential to the well-being of the firm.”
Tarras says, another element of the buy-sell agreement is to furnish the departing shareholder with liquidity. “…there typically is some form of cash down payment with the remainder denoted by an interest-bearing promissory note [usually 5 to 15 years],” he informs. “The departing shareholders may require that the hospitality firm pledge the assets of the firm and that the remaining shareholders personally guarantee the promissory note.”
“…the most frequent reason for establishing buy-sell agreements is for estate planning purposes,” Tarras says.
There are tax advantages and liabilities for both the seller and buyer of stock via the buy-sell agreement, and the author enumerates many of these.
One, big advantage of the buy-sell agreement is that it provides for the running of the company with a minimum of disruption through the stock-cash transition process, Tarras offers.
Tarras, John M.
"Planning Buy-Sell Agreements In The Hospitality Industry,"
Hospitality Review: Vol. 5
, Article 5.
Available at: http://digitalcommons.fiu.edu/hospitalityreview/vol5/iss1/5