Every business owner needs to have a plan in place for how their interest in the business will be allocated or sold in the event of disability, death, retirement, divorce, dispute, or in the event that they simply no longer want to be a part of the business. Enter the buy-sell agreement. A buy-sell agreement is an agreement that lays out exactly how a business’s assets, ownership, and control shall be divided if one of the abovementioned events occurs. It is especially useful if you are a co-owner of a business. The buy-sell agreement in these instances can be seen as a sort of business pre-nuptial agreement; laying out what will happen in the event that the partnership ends.
A buy-sell agreement should detail, among other things:
- Each partner’s ownership interest;
- The dollar amount each partner’s interest in the company is worth;
- Notice requirements and rights of first refusal for each partner in the event that one partner decides to sell their interest in the business; and
- Types of events that will trigger the applicability of the buy-sell agreement and its provisions.
Even if you think that your business partnership would never go south and result in conflict, there are other situations that could occur and leave you in a situation that is uncomfortable and may not be in the best interest of the business. If no buy-sell agreement is in place you may end up in a situation where your former partner’s spouse or child is your new co-owner, or where the company is subject to a division in a complicated divorce. There are plenty of scenarios in which the business could suffer greatly due to disruptions in being able to run the business’ daily affairs if there is no clear plan for how to proceed in the event of a partner leaving, becoming disabled, or dying.
It is also important to keep in mind that partners in a business should obtain a life insurance policy as well as disability insurance in an amount equal to the value of their ownership interest in the business. This is prudent because often times a business might is worth more money than it has available in liquid assets and in those instances, it is not feasible for the business to use all of its money to fund a buy-out. Business partners should consult with their financial advisors and CPAs in order to determine the best options they have in terms of funding the buy-sell agreement.
Keep in mind that even though creating a buy-sell agreement might seem like an additional hassle or expense when starting out a business, failing to do so will undoubtedly lead to difficult decisions, situations, and possibly a lot of attorney’s fees and costs in the future. Our firm can help you plan ahead and make this process painless. We offer both in-person and virtual consults, please feel free to call our office at 305-460-0145 to schedule a consultation or click here.