The Importance of Buy-Sell Agreements

Posted on July 2, 2012 · Posted in Blog

Before we get into the topic of this blog post, we first need to understand what a buy-sell agreement is. A buy-sell agreement is like a prenuptial agreement for business owners, and if you have a partner or shareholders odds are you will need one.

While an estimated 50% of marriages end in divorce, over 70% of all business partnerships end in failure. A buy-sell agreement is a legally binding agreement between a business and its owners that clearly stipulates how a significant event—such as death, divorce, or departure of a partner—affects the management and control of the business.

A well drafted agreement anticipates the intent and needs of the owners, as well as the potential conflicts that may arise among them if one or more wishes to sell his/her interest in the business or is forced to dispose of such interest, as may happen in a personal bankruptcy proceeding.

To have an effective buy-sell agreement, it must describe:

  • When, and under what circumstances, a business may dispose of an owner’s interest.
  • Whether the other owners or the business have the opportunity to buy the interest from that owner prior to its disposition to an outside party.
  • How much to charge for that interest and how it will be valued.
  • Whom the remaining owners are willing to accept as a substitute owner.

What is the importance of a buy-sell agreement?

A buy-sell agreement facilitates the orderly transfer of business interests when certain specified events occur:

  • Creates a market for the departing owner’s interest in the business when no such market exists in the absence of such an agreement.
  • Creates continuity for remaining minority owners and key non-owner employees.
  • Ensures that the survivor of a deceased owner is compensated for the deceased owner’s interest.
  • Enables surviving owners to purchase a deceased owner’s share promptly, thus preventing the deceased’s interest from being locked up in probate and eliminating the possibility of a personal representative of the deceased becoming a voting owner.
  • Sets an accepted value for the purchase of an owner’s interest, eliminating the possibility for costly and time-consuming litigation.
  • Determines each owner’s interest in the business.

If you don’t have a binding buy-sell agreement in place, your business is at risk. Without a clear succession plan, disputes can arise among partners—or their surviving spouses—that lead to loss of valuable time, increased expenses, and costly litigation. This is why it is vitally important to have a buy-sell agreement in place from the outset of any business relationship involving two or more people.

Source: SmallBusiness.FindLaw.com

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