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Buy-Sell Agreements: An Ounce of Prevention is Worth a Pound of Cure
January 18, 2016
by Trevor Gasper

 

South Bend / Mishawaka, IN – The Issues Buy-Sell Agreements Seek to Resolve

You’ve established a successful business with another owner who you know and trust.  You’ve worked together for years to make the business successful.  Now, imagine your business partner dies.  Or is divorced.  Or files for bankruptcy.  Or the two of you have a falling out.  What happens to the shares held by your business partner?  Without a comprehensive buy-sell agreement between the parties, you may not like the answer to these questions.

Unfortunately, for many owners of small businesses, they find out the necessity of a buy-sell agreement too late.  They wake up to find themselves in business with their former partner’s children, or heirs.  Worse yet, they wake to find out their business partner transferred some or all of her ownership interest to a competitor.  Taking the time now to formulate a comprehensive buy-sell agreement can pay dividends to a business owner.

Buy-Sell Basics

Ordinarily, a buy-sell agreement is a written contract between owners of a business regarding how each owner’s interest in the business is affected by various events.  A well-thought buy-sell agreement will establish rights in the event of various contingencies, such as:

  • the death of an owner;
  • the disability of an owner;
  • the divorce of an owner;
  • the bankruptcy of an owner;
  • the attempted transfer of shares of an owner; and
  • the termination and/or cessation of employment in the business by an owner.

For example, a buy-sell agreement may grant a surviving owner the right to purchase the ownership interest of a deceased shareholder at a pre-negotiated price and on pre-negotiated terms.  The Agreement can mandate that the business or owners carry insurance policies to fund potential purchases in the event of death or disability.  Likewise, a buy-sell agreement can restrict and prevent owners from transferring their interest without the consent of the other owners or by granting the remaining owners a right of first refusal.

In addition, a buy-sell agreement can cover topics that are not contained in the business’s bylaws or operating agreement such as covenants against competition, non-disclosure agreements, anti-solicitation provisions, owner voting rights, etc.

Just as dangerous as operating a business without a buy-sell agreement, owners should be wary of “cookie-cutter” buy-sell agreements that don’t fit the realities of your business.  A business owner should take the time to carefully think through the realities of various contingencies and how the owner and business may best weather such contingencies.

Buy-Sell Agreements for Single Owner Businesses

Even if you are the sole owner of your business, a simplified buy-sell agreement may be the tool you need to extend the life of your business.  More often than not, a single-owner business ceases to exist upon the death or retirement of its owner.  Employees are left without work and your family is deprived of its stream of income.

If you can identity a potential purchaser (or purchasers), either from among your family, workforce or otherwise, an agreement can be created detailing the potential terms of the purchase of your business in the event of various contingencies.  The purchase price may either be fixed at a price or at a method for establishing a price.  As with a regular buy-sell agreement, the agreement to purchase can be funded through the purchase of insurance

The content of this article is for information purposes only, and neither contains nor should be considered legal advice. If you have any questions or would like assistance in creating or reviewing your business’s buy-sell agreement, call me at 574.243.4100 to schedule an appointment.

 

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