You and your business partner work great together and you’re building an amazing business. Will you be able to work as well with your business partner’s spouse? Ex-spouse? Adult children? A bankruptcy trustee? If not, you need a buy-sell agreement in place as soon as possible. A buy-sell agreement is the single most important tool for determining who will operate your business after the departure of one of the business owners or shareholders.
What is a buy-sell agreement?
A buy-sell agreement is a contract between business owner partners or shareholders that controls future ownership of the business. It is very similar to your personal will, only it is for your business. The agreement should spell out how the assets of the business will be divided in the event an owner departs the business suddenly, usually because of death, disability, or other life changing event.
Why do you need one?
The buy-sell agreement is necessary to preserve the continuity of the business ownership and to ensure that both the buyers and sellers’ interests are protected. The agreement also ensures that all parties understand their rights and obligations from the outset.
Like most things in life, it’s far easier to come up with a plan before catastrophe hits, rather than trying to come up with a plan when you’re in the middle of a stressful situation. For that reason, you should draft your buy-sell agreement when you form your business, or shortly thereafter.
What should a buy-sell agreement cover?
Each business’s buy-sell agreement should be specifically tailored to their individual business. A competent attorney paired with a tax professional can help you assess your specific needs and create an agreement that covers you.
There are three main topics that should be addressed in every buy-sell agreement.
Great! You drafted a buy-sell when you formed your business – it’s good forever, right?
Sorry, nope. The buy-sell agreement you drafted for your fledging company most likely won’t meet the needs of your growing business. When you were 25, you might have had a buy-sell agreement in place that entitles your older brother to buy your shares of your business. Fast-forward to when you’re 45, does that scenario still make sense now that you are married and have a child? What about when you’re 65, your older sibling has retired, and your adult child is now working in the business? You’re going to want to revisit and reevaluate your buy-sell agreement regularly, especially anytime a major event occurs or your goals have changed.
You should think of your buy-sell agreement as an opportunity to have periodic check-ins with your business partners about your changing goals for the future of your company. It is a great tool to start that candid conversation with your business partners.
Need to put a buy-sell agreement in place? Revise a long forgotten one? Erin loves helping businesses plan for the future.
IMPORTANT DISCLAIMER: This blog post is published for general informational purposes only. This is not legal advice, and it does not form an attorney-client relationship or constitute attorney-client communication. If you need legal advice on a buy-sell agreement, give us a call at 206-456-2579.