Who Needs a Buy-Sell Agreement?
Imagine you have built a successful company. After decades of hard work, you finally let yourself entertain thoughts of retirement. Your children are ready to take over, but you want to make sure the transfer goes smoothly to secure your legacy. Imagine again, that you and your three best friends decided to take the plunge and open that start-up you have been taking about for years. A few of you will be investing personal funds, the rest will be contributing sweat equity, but you will all have an equal share in the business. Imagine once more, that the business you started is ready for the next level and you are looking into bringing on new partners, people you had no prior relationship with. You are excited, but also nervous, about what bringing new people in could mean to the future control of your business.
What do these above scenarios have in common? They all absolutely need buy-sell agreements.
What is a buy-sell agreement?
A buy-sell agreement is a legally binding agreement between owners of a business that sets forth how an owner’s share of the business may be sold, gifted, or reassigned based upon specified triggering events such as death, incapacitation, disability, bankruptcy, divorce or retirement. Think of it as a business pre-nuptial agreement.
Why is a buy-sell agreement essential?
While pre-nuptial agreements infamously provide for the terms of a couple’s divorce, a good pre-nuptials agreement also provides the framework for the conceivable eventualities a couple may face and acts as an agreed upon rule book. The same is true for a buy-sell agreement. Rather than wait until a triggering event occurs to sort the affairs of a business, often to disastrous results and financial losses, taking the time to sit down with an experienced attorney while the relationship between owners (and future owners) is amicable to discuss the foreseeable eventualities and future plans is the best way to ensure the future of a business.
Considerations
The experienced attorneys here at Vogt, Resnick & Sherak, LLP can help guide you and your partners through the complicated and nuanced terms to create a customized buy-sell agreement to meet the needs of your future business plans. A few examples of considerations are:
- Type of Buy-Sell Agreement: We advise on whether a redemption, cross-purchase, or a combination of the two would be the best fit for you and your partners, taking into consideration tax implications as well as business succession.
- Triggering Events: We advise on the triggering events that can and will affect the future of your business. For example, in the event of death, should your business have insurance to fund the purchase price of a deceased owner’s share or have key person coverage? In the event an owner goes through divorce, would you want to be stuck working with your partner’s ex-spouse who might end up with some ownership in the business in the divorce settlement? As you can see, there are many critical scenarios to go through.
- Method of Calculation for Purchase Price and Payment Terms: We advise on the best valuation method in the event an owner sells his or her share of the business based on the specific business and other considerations.
While buy-sell agreements are critical, they can lead to some painful or awkward discussions. It is no wonder many people avoid creating one. The result, however, can be catastrophic to the business. Having an experienced team of attorneys delicately guide you through this process is the surest way to secure the success of your business and its future.