A buy-sell agreement is a key part of any business arrangement. The buy-sell agreement is the “prenup” that determines what happens when the business arrangement breaks up.
So, why enter into a buy-sell agreement? The easy answer is that the ownership of the business will change at some point. The owners will die, retire or have an offer that they can’t refuse. So then what happens? Well, for far too many businesses that question doesn’t get answered until it’s too late and the partners are scrambling to answer the question. With some planning, the partners could have answered these questions when they don’t have the emotions running at a high point and possibly a lack of time to examine all of the issues.
So what does a buy-sell agreement do:
- It creates a market for the owner’s business interest. If an owner decides to die, retire, or want to walk away, the terms are in place to handle each situation and provide a market for the ownership interest.
- It provides for the mutually agreeable price and terms. When the agreement is drafted, the owners can determine a method to set the price for the ownership interest and the terms of the sale. Since neither owner knows who will be the buyer or seller, they will be more amenable to setting terms beneficial to each other.
- It facilitates a smooth transition of management and control of the business interest. If the owners take the position that they want to protect the business, then having a smooth transition of the management of the business will be an integral part of the agreement.
- It assures the owner that the financial future of his or her heirs is not dependent upon the fate of the business. Many closely held business owners have invested much of their fortune into their businesses. Upon the death or retirement from the business, the family can be protected from future businesses fluctuations if the buy-sell agreement is properly drafted and the means to pay for the owner’s interest is paid for with life insurance or other suitable financial methods.
- Reduces potential for discord and court battles
All owners of closely held businesses will be faced with the dilemma of how to move the ownership interest at death or retirement or other desired triggers. As with the dissolution of a marriage. This change in ownership can be argued by attorneys in front of a judge or by thoughtfully thinking through these issues in advance and putting the desired terms a buy-sell agreement. Then when the “trigger” happens the terms of the sale are already put in motion without the extra cost and emotions that could arise.