Do you have a business partner? If so, would you have ever married your partner’s spouse? Well, by not having a buy-sell agreement in place, you could be engaged to him or her right now without even knowing it.
Starting a business with a partner is like getting married. It’s magical and exciting. You have all the best intentions when you go into it. And, like a marriage, sometimes all goes well and it works out for years, but other times it ends up in divorce.
That’s where a buy-sell agreement comes in.
A buy-sell agreement to a business is like a prenuptial agreement to a marriage; it defines the division of the interests in the business when some triggering event occurs. Common triggers are the death, disability or retirement of an owner; and, even when one owner just wants to leave the business.
Experience has shown that owner disputes that arise when one of these triggering events happen can drag on for years and cost the business and owners thousands of dollars in expenses and fees that they could have otherwise avoided. And, business disputes, like divorce disputes, are emotionally draining. With a buy-sell agreement most owner disputes can be avoided.
A buy-sell agreement is a binding contract between the owners. A well drafted buy-sell defines the triggering events, sets out who can buy the departing owner’s interest and how that value is established. It will also layout the terms of any buyout.
The buy-sell also helps preserve the continuity of ownership and ensures that everyone, the company, the departing owner and those continuing on in the business, is treated fairly. For example, when an owner dies unexpectedly a business is usually left in turmoil while it recovers from the sudden loss of one of its principals. There are usually gaping holes that the company must overcome while the responsibilities of the deceased owner are covered by other partners or employees. The owner’s family is also in turmoil over the loss of their loved-one and perhaps the “bread winner” of the family. A buy-sell agreement, though, will clearly outline how the surviving owners will buy-out the heirs of the deceased owner so that the business can continue to function more smoothly during these troubled times and avoid a long, drawn out dispute.
Buy-sells can be in the form of a cross-purchase plan (where the other owners buy the interest of the departing owner) or a repurchase/stock redemption plan (where the business actually buys the interest). It can even be funded with life insurance or can establish flexible payment terms. The agreement can provide for a down payment on the buy-out price with an installment payment plan at a reasonable interest rate.
Buy-sells are a significant benefit for a business owned by multiple owners. While the buy-sell does cost the business some money up front in the form of legal fees and insurance premiums (if funded with life insurance), the cost is worth it because it’s an insurance policy against trouble.
Attorney Andrew Garcia, your SouthCoast Business Attorney, is a principal of Phillips Garcia Law. He’s created a Business Legal Planning system that will walk you through the process of forming your Massachusetts corporation. Locally he has appeared live on WBSM-AM radio and nationally on NBC’s Today Show and Fox’s Fox & Friends program. If you are interested in learning more about his Business Legal Planning services, just contact him at email@example.com or by calling (508) 998-0800.