Does Your Business Need A Buy-Sell Agreement
If you start a business with friends or family members as co-owners, you should prepare for the possibility that one partner may eventually leave the business. Retirement, divorce, bankruptcy, or death could cause a co-owner to give up their shares in the company. But who gets their shares in these situations?
The worst-case scenario involves a stranger or third-party becoming a co-owner in your business. You can avoid this by having a business attorney draft a buy-sell agreement that binds all of the partners.
Basic Terms Of Buy-Sell AgreementsBuy-sell agreements state the terms under which the co-owners have the option to buy out a partner who is leaving the business. Some common terms included in buy-sell agreements include the following:
- The remaining co-owners are given the right to purchase shares before anyone else when one co-owner departs the business.
- A co-owner may be forced to sell their shares to the other co-owners in some cases.
- A method of valuation that will be used to price the shares.
- A payment schedule that must be followed for the buyout.
Forced BuyoutsThe buy-sell agreement should include provisions requiring a forced sale of a partners shares in certain situations. Divorce, bankruptcy, death, or disability may all require a buyout to protect the remaining partners’ business interests.
For example, consider a divorce of one partner that involves an equitable distribution of each spouse’s assets, including business assets. The partner’s spouse could ask for one-half of the partner’s shares in the business as part of this divorce.
The buy-sell agreement should anticipate this possibility and require an automatic buyout of the spouse’s shares in this case. The spouse would still receive compensation for their shares, but wouldn’t be able to use their shares to impact business decisions.
Bankruptcy of one partner could also present problems that could cause a business to shut down. The bankruptcy court could liquidate business assets to pay off the insolvent partner’s creditors.
The buy-sell agreement should require a partner to sell their shares to the co-owners before declaring bankruptcy. The money can be used to pay the partner’s creditors while the business remains encumbered by the bankruptcy proceedings.
Valuation And Payments
There are many different ways to value a business. The important thing is that a formula or method is stated in the buy-sell agreement, so the partners don’t have to argue about which valuation method should be used.
You also need to think about a payout schedule that fairly compensates the departing co-owner without draining the business’s cash reserves. An initial lump-sum payment may be given, with the remaining balance paid off over the course of several years in installments.
The best time to negotiate a buy-sell agreement is early on in the life of the business. Contact a business attorney to discuss the steps you need to take to protect your business if one partner decides to leave.
The attorneys at King Law Office handle operating agreements, buy-sell agreements, and other business law matters. Call (888)748.KING to schedule a consultation at one of our multiple office locations in North and South Carolina.