Buy-Sell Agreements and Company Partnerships
No matter the business, it’s important that every business owner have a plan in place for how their interest in the business will be dealt with in regards to allocation or selling in the event of retirement, divorce, dispute, disability, death, or simply in the event that they don’t want to be a part of the business anymore. This is where buy-sell agreements come in.
A buy-sell agreement is one that clearly states exactly how a business owner’s control, ownership, and assets will be divided if one of the aforementioned events occurs, and is especially useful to co-owners of a business. In the instance of being a co-owner, a buy-sell agreement can be likened to a sort of pre-nuptial business agreement, laying out precisely what will happen in the event of the partnership’s termination.
A Precautionary Measure
You may think that in a million years, your business partnership could never go belly-up and result in a conflict, but there are more situations than just a conflict of interest between partners that can leave you in an uncomfortable position or are not in the best interest of the business itself.
If you have no buy-sell agreement in place and your partner is faced with one of the aforementioned scenarios, you may end up in a situation where the spouse or even the child of your former partner is now your new business partner. Alternatively, the business may be subject to a division in a messy divorce.
Whatever the situation, anything that would result from a lack of a buy-sell agreement can cause a business to suffer severely due to disruption in the ability to manage the business’ daily affairs.
Obtaining life insurance policies and disability insurance policies in an amount equal to the value held in the business’ ownership is also vital to keep in mind, because it is often the case where a business may be worth more than it has available in liquid assets and it becomes infeasible for the business to use all of its money to fund a buyout.
In order to determine the best options available to an individual business for funding a buy-sell agreement, business partners should conduct consults with their financial advisors and CPAs.
Among other things, some of the most highly suggested matters to be included and expounded upon in your buy-sell agreement are:
- The ownership interest of each partner.
- The dollar amount (or whatever national/international currency you are using for your business) that each partner’s individual interest in the business is worth.
- The types of events that will trigger the buy-sell agreement’s application, and the provisions that will be made for it.
- Requirements for the notification of a trigger event’s occurrence.
- Rights of first refusal for each partner in the scenario that one of the partners decides to sell their interest in the business.
Conclusion for Buy-Sell Agreements
Creating buy-sell agreements may seem at first glance like a hassle or additional unwanted expense when starting a business, but failing to possess one of these agreements will without a doubt lead to difficult situations and decisions in the future, as well as the possibility of lofty attorney fees. If you need a great legal team for unfortunate situations like this, look no further than Thompson Law.