Why does a business need a buy/sell agreement?
In any business with multiple owners, there is a good chance that at some point, one or more of those owners may no longer be affiliated with the company, whether by choice, death, bankruptcy, or divorce. It’s important for business owners to plan for this in advance, so that when one of these situations occur, there is a preexisting agreement that sets out an orderly way to handle the situation. The best way to do this is with a buy-sell agreement. A buy-sell agreement is a contract between business owners that dictates who can buy a departing owner’s share of the business and establishes a fair price for the owner’s stake. The agreement may also provide procedures to resolve disagreements when a majority of the owners but not all of the owners decide to sell the business. The following list is why a business needs a buy/sell agreement.
- If your partner decides he no longer wants to be involved in the business, you have a way of obtaining his stake in the company so that he can’t continue to influence the business after he is no longer involved. Buy-sell agreements often provide that if an owner-employee were to become no longer employed by the company, that owner-employee must sell his stake back to the company or the other owners.
- If you want to leave the business and no longer want to own stock in the company, you have a way of fixing the fair price in your stake. Again, since a buy-sell agreement sets out a method of determining the fair price of the stake of the departing owner, you can eliminate potential lawsuits and disputes by agreeing in advance what is fair. This can be of benefit to you if you are the one leaving the company.
- It lets the partners set expectations as to the transferability of interests in the company. Even when a partner does not want to leave the company, he still may want to sell part of his stake in the company to partially “cash out” for any number of reasons. Putting in place a buy-sell agreement can give the remaining partners a right of first refusal or other protections to give them more control over ownership changes in the company. In the least, the mere process of writing a buy-sell agreement is beneficial because it gives the partners a chance to discuss and decide these issues at a time when there is often a surplus of good will.
- The time when someone leaves a company is not the time to be negotiating the fair value of a business. Often partings are awkward and sometimes downright unpleasant. Emotions may run high, precluding a careful and thoughtful discussion of how to resolve disagreements. Instead, you should set the mechanism for calculating the value while spirits are high.
- It can protect your family. One of the most likely reasons why you may need to leave your company or transfer your stake is upon your death or disability. At this point, you will not be capable of negotiating on behalf of your family. Your family will need and deserves to be paid the fair value for your interest. If there is no buy-sell agreement in place, the surviving owners may be reluctant to pay a fair amount for your stake and are likely to at least negotiate against your family members. A buy-sell agreement provides a pre-agreed method of making sure the work you put into your business takes care of the people you care about most.
Buy-sell agreements are a crucial part of business planning for any venture which is owned by multiple parties. They can be used for corporations, limited liability companies, and partnerships. Drafting one should not be put off, because if you don’t put one in place at the outset, you are unlikely to do so until issues arise. You should consult an attorney with experience in business and corporate matters for more information.