When you’re in business for yourself, there are a lot of different possibilities you have to consider – including the fact that you or one of your business partners may one day decide to move on to something else, retire or pass away.
A buy-sell agreement is one way you can plan ahead for these kinds of events so that your operation can make a smooth transition without unnecessary legal hassles.
What does a buy-sell agreement do?
Essentially, a buy-sell agreement is part of your partnership agreement that dictates exactly when and how any partner’s share of the company can be transferred to someone else if that partner is incapacitated, dies or exits the business.
Without one, your company is potentially taking a big risk. For example, imagine if your business partner dies, leaving everything to their spouse. Without a buy-sell agreement, you could effectively be forced to take on their spouse as your partner. These types of decisions are typically better made well in advance and in consultation with all partners of the business.
How does a buy-sell agreement work?
Usually, the agreement either calls for the remaining business partners to purchase the affected partner’s share or for the business itself to buy the partner out, although a mix of the two is also possible. Buy-sell agreements may also include key employee designations so that successors can be named, or insurance policies to help protect the business from losses if a partner dies.
An effective buy-sell agreement should include, at a minimum:
- A description of whatever events you agree should “trigger” the clause, including a partner’s death, their disappearance, a permanent or long-term disability and retirement.
- A valuation plan, so that everybody has an advanced understanding of exactly how the affected partner’s share will be appraised when the event comes, whether that’s through a specific formula or via an independent expert.
It is difficult to anticipate all the potential possibilities, but experienced legal guidance can make it a lot easier to identify strategies that will keep your future secure.