Sound business planning dictates that when founding any business with two or more owners or shareholders, a buy-sell agreement should be drafted. A carefully drafted Buy-Sell Agreements can assure owners that their interest in the business is secure regardless of unforeseen circumstances that may arise. Such documents serve like pre-nuptial agreements, guiding the decisions made when an owner leaves the company.
A Buy-Sell Agreement helps to answer the question of what will happen to the business if one of the owners can no longer continue. This legally-binding agreement between the co-owners of the business governs what happens if a co-owner leaves the business (typically when the co-owner dies, chooses to leave, or is forced to leave). Buy-sell agreements protect everyone’s interests, including the remaining owners and the shareholder who wants to leave the company.
Also known as a buyout agreement, a Buy-Sell Agreement should be drafted anytime a business with two or more partners or shareholders is founded. It typically begins by specifying particular ‘triggering events’ that will cause an optional or mandatory buyout of an owner’s interest. The most common triggering events include death or disability of a co-owner, desire to sell the interest to an outsider, retirement of an owner, divorce or bankruptcy.
This plan for future transition lays out who can buy a departing shareholder’s portion of the business. For example, it may require the shareholder to offer his or her portion to existing shareholders first. This way, an owner is prevented from selling his interests to an outsider without obtaining the other owners’ consent.
A Buy-Sell Agreement also provides instructions for determining the price to be paid for the shareholder’s interest in the business, typically by determining the valuation method that will be used at the time the shareholder departs. The goal is to approximate the business’s fair market value. This will help avoid disagreements over the financial value of the co-owner’s interest in the business.
Finally, what happens to the finances of the company if a business owner dies, becomes bankrupt, or is otherwise unable to remain involved in the business? In some situations, it may be wise to purchase an insurance policy to provide a funding source to cover such circumstances and ensure the continued success of the business. Otherwise, the business could face significant financial difficulties and liquidity problems upon an owner’s death, divorce, or bankruptcy.
This agreement should be drafted by a skilled business attorney who can advise each owner regarding their individual interests in the agreement. A lawyer experienced in Buy-Sell Agreements can help you select and draft the right type of agreement.