You and your business partner are about to say “I do” and embark on an entrepreneurial “marriage.”
You’ve got the business plan in place, action items lined up, and you’re ready to begin making money. Before taking this proverbial leap, did you ask your business partner to sign the business world’s version of a prenuptial agreement—a Buy-Sell agreement? If not, consider the following scenario:
Jack and Jane form a limited liability company, “ABC Bakery, LLC,” of which each of them is a 50% owner. Jack and Jane maintain a great business relationship throughout the years, running a successful bakery in town. Fifteen years later, Jack is diagnosed with a disease that will prevent him from continuing to work, and he ultimately wants to sell his interests in the company. Jack eventually sells his shares to his friend, Dan, who, from day one, is a thorn in Jane’s side. Dan disagrees with everything that Jane suggests, and the two equal owners become deadlocked, unable to make any decisions regarding day to day business decisions. Dan eventually applies to the Court for a Court-ordered dissolution of the company, and the Court indeed grants his application. ABC Bakery is forced to liquidate its assets, sell every part of the bakery, and close the bakery’s doors.
The scenario above could have been avoided had Jack and Jane implemented an effective Buy-Sell agreement when they began the business. A Buy-Sell agreement is an agreement between multiple business owners which plans for situations where one owner is no longer affiliated with the company, whether by choice, disagreement, death, disability, bankruptcy or otherwise. Buy-Sell agreements effectually stipulate terms and procedures for when such unplanned circumstances arise. These agreements are particularly relevant and important in the context of closely-owned, family-owned, and other small businesses. They allow for smooth transitions of ownership, and provide a form of comfort for the other business owners that their business will continue to operate and their interests will be protected. Despite what may appear as a great, friendly relationship among business partners does not always pan out as such down the road.
Below are 5 important reasons why your small business should have a Buy-Sell agreement in place.
- If your partner wants out (i.e., retire) or suddenly dies, you should be able to choose your new partner, rather than risking his/her shares falling into the hands of someone with whom you do not get along. In typical Buy-Sell agreements, remaining owners can be offered a “right of first refusal” when a partner attempts to offer his interest for sale, allowing the business to continue without ownership disruption.
- A Buy-Sell will minimize disputes between remaining co-owners. For example, the family of the deceased owner, by implementing a defined strategy. This will certainly save you, the business and the deceased owner’s family significant stress and legal fees (especially in the wake of a friend/family member’s death).
- The partners can mutually establish a method for determining price in the event shares are sold/purchased. Doing so will save you (and the company) time and expense of determining valuation, often requiring the employment of valuation experts and appraisers.
- Your family can be protected by determining what happens with your ownership interests (that they inherit) and what will be the fair price for a buyout of those interests.
- Your business’ assets and liquidity are protected by providing a financial and tax plan for each of the different triggers addressed in the agreement.
If you are already in business, it is never too late to establish A Buy-Sell Agreement. By establishing a well-written Buy-Sell, you are saving significant time, effort and legal fees that are inevitable in such disputes.
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