Negotiating Fair Buy-Sell Agreements
Newer entrepreneurs may have not thought about this yet: but what happens to the business if you decide to retire? What happens if one of the partners suddenly dies? How does the business continue if one of the shareholders becomes disabled?
What some entrepreneurs don’t realize when they are only starting out is that it’s also good to think about the future of the company. And here, we’re not just talking about expansion and business growth. We’re talking about the very real possibility of an owner leaving their business. Here’s where the buy and sell agreement comes in, and that’s what we’re going to talk about today. What is it? How does it work? What is it for? Let’s take a closer look.
What Is A Buy And Sell Agreement?
A buy and sell agreement is used by sole proprietorships, partnerships, and closed corporations to settle these disputes in case an event triggers a buyout. It allows all parties involved to divide the business share or interest in the event that one of the owners leaves.
For any co-owned businesses, it is necessary that the owners have a buy-sell agreement in place to safeguard both of the owners and their futures. A buy-sell agreement, also known as a buyout agreement, protects everyone’s interest by setting the price and terms for a buyout. A buy-sell agreement is a legally binding agreement between co-owners of a business that governs the situation if a co-owner wants to retire, chooses to leave the business, goes bankrupt, wants to sell the shares to someone else, goes through a divorce or passes away. A buy-sell agreement is an approach used by sole proprietorships, partnerships and closed corporations to divide the business interests and setup details for the business buyout agreement, such as flexible payment terms instead of an immediate, lump-sum cash payout.
A buy and sell agreement is like a “business prenup”. It is a legally binding agreement that is used to reallocate a share of a business in the event that an owner dies or leaves the business. This document governs the situation should anything happen to one of the business owners. In a nutshell, we can say that it allows someone else to buy the shares of the departing partner, proprietor, or shareholder.
Buy and sell agreements are also known as “buy-sell agreement,” “buyout agreement,” or even “business will.” It is used by sole proprietorships, partnerships, and closed corporations in order to divide the business share or interest when an event triggers this demand.
In this way, buy and sell agreements are similar to a premarital agreement, except it’s between business partners — and there’s typically no marriage involved. But a “divorce” of sorts could happen when one of the partners leave the company. Certain events can trigger this buyout, the most common of which are death, disability, retirement, or an owner leaving for any reason.
Buy and sell agreements consist of legally binding clauses which help control certain business decisions.
It dictates who can buy the departing partner’s or shareholder’s share of the business. It will be agreed upon whether outsiders will be able to buy these shares or the buyers will be limited to other partners and shareholders. It will also dictate what price will be paid for these shares. Buy and sell agreements can be in the form of a cross-purchase plan. It can also be a repurchase plan.
This legally binding agreement will reallocate a share of a business in the event of retirement, death, disability, or any other reason for departure. It consists of legally binding clauses that help control certain business decisions going forward.
How Is The Buy-Sell Agreement Used?
This agreement will dictate who is allowed to buy the departing partner’s or shareholder’s share of the business, and how much they will have to pay for these shares. It may be limited to partners and shareholders, or it may be opened to outsiders. The purchase price will be agreed upon in order to anticipate business divorces.
Under these terms, the specified buyer is legally obligated to buy the interest, while the interest holder is obligated to sell the interest. This is done to help preserve the business while considering all parties involved and making sure the agreement is fair.
Properly structured, a buy-sell agreement has plenty of advantages. It can control the value of the business for estate tax purposes as well as the estate taxes due on the assets.
For the departing partner, it can convert the business interest into cash, in order to provide financial security for the deceased interest holder’s family. For the remaining owners, it protects them from gaining an unwanted co-owner while also ensuring the continuity of the business.
It also ensures the orderly disposition of the business, in the event that the sole proprietor is no longer capable of continuing it. The two main types of buy-sell agreements are stock redemption and cross-purchase plans. It is a good idea to get legal advice as to which one is better for your company.
How Gudeman Can Help
It is advisable that you work with an attorney while drafting a suitable buy-sell agreement. This will ensure that the agreement is fair for everyone involved. It will protect you, your partners, your shareholders, and the business itself. In the future, when your business has a lot of loyal customers, this agreement will somehow protect them too — by allowing their favorite brand to survive.
In fact, it is advisable to work with an attorney throughout the entire business planning phase. There are a lot of things they can help you with: and securing your business’s future is just one of them. If you want your business plan to be foolproof, hire a lawyer. Work with Gudeman & Associates, P.C., today.
We’re Here To Help. Call For A Consultation.
Every co-owned business needs a buy-sell agreement to protect both of the owners, and Gudeman will construct an agreement where all the owners and their families are protected. To learn more about how our experienced team can help you grow your business and protect your interests at every stage, please contact us via email or call 248-546-2800 to speak with a member of our team. We look forward to helping your maximize your business’ potential.