Why should I have a buy/sell agreement?
As a business owner, having a buy/sell agreement protects your interests and helps avoid potential conflict with your fellow business owners. Many business owners work their entire lives to develop a successful business, only to have the company significantly lose value upon the death, retirement or change in personal situation of a key owner. Having a formal, written document between owners to detail transition plans is a best practice that should be utilized with every business owner.
These agreements are key for privately held companies with multiple owners. The primary purpose of a buy/sell agreement is to minimize disruptions to the business if a triggering event necessitates the purchase of one owner’s interest by other owners such as a shareholder’s death, disability or the voluntary or involuntary termination of a shareholder’s employment.
Components of a good buy/sell agreement generally include a customized document that addresses the owners’ objectives and has a business valuation clause rather than a specified valuation formula.
Buy/sell agreements protect both owners and owners’ family members. In the event of unforeseen circumstances, such as illness, divorce or death, they help ensure that ownership remains in the hands of those who built the business, and that the former owner or owner’s heirs receive fair value for their interest in the company. Buy sell agreements inform an employer’s family what should be expected when their family members do not have ownership over the company
Moreover, a good buy-sell agreement helps prevent business owners from finding themselves in business with a spouse or child who has had no involvement in or knowledge of the company. It also helps keep spouses or children from being saddled with the obligations of a business in which they are uninterested or uninvolved.
A buy/sell agreement benefits the business by alleviating uncertainty, helping to maintain business value and smoothing transitions so that employees and clients feel less of an impact when a key leader is no longer with the company.
People are often unwilling or unable to plan for possibilities such as divorce, disability or death. However, it is encouraged that owners understand these circumstances and the impact they may have on your fellow owners and their family. Are you leaving them with uncertainty and potential conflicts? Or are you leaving them with a well-thought-out plan and specifics on how they will receive the benefit of your investment in the business?
Remember that thinking about a buy-sell agreement, talking about a buy-sell agreement and reading drafts of a possible buy-sell agreement written by your attorney are not the same as having a signed document in place. Given the cost and peace of mind associated with an effective buy-sell agreement, why do so many businesses not have an agreement in place? Because unexpected circumstances are just that: unexpected nut it better to plan ahead.