Questions Surrounding Buy-Sell Agreements. What happens when one partner is ready to exit the business? What are they entitled to? What are the surrounding terms and conditions of the transition/payment? Similarly, what happens if a business partner suddenly dies? What happens if an ownership interest goes to a spouse? How do such events affect the management of your business?
These are tough questions…and they are much easier to address early, meaning, buy-sell agreements should be put in place when the business is formed, not when the business is making lots of money…and tragedy strikes.
Buy-sell agreements are legally binding contracts between a business and its owners. The buy-sell agreement describes how a significant event, such as the departure of a partner, death of a partner, partner-related divorce, or partner bankruptcy, will affect the ownership and control of the business. Buy-sell agreements must be tailored to the specific needs and operations of the business. Sound buy-sell agreements will consider:
- Who the remaining members will accept as a new partner/member;
- Whether interest will be paid pursuant to the payment schedule;
- Whether the remaining members will have priority to purchase the interest over an outside party/member; and
- Under what circumstances does the business control the disposition of an interest
Ultimately, the buy-sell agreement is a key protection mechanism for the owners’ long-term interests. A business with an inadequate/non-existent buy-sell agreement exposes the entire business when a triggering event occurs.
The take away is simple: when it comes to buy-sell agreements, get them established and on paper early in the game.