When Tom and Marie came in for an initial consultation, they brought a file full of financial statements and a binder of legal documents. On the surface their situation seemed fairly typical, they had two partners, an expanding operation, and kids who want to join the business.
As we talked, Marie divulged that one of their partner (her brother-in-law) was not always honest. In fact, Tom said his brother has always been lose with money and was constantly on the verge of bankruptcy. Beyond succession, my attention turned to protecting the business and by extension, ensuring Tom and Marie’s long-term financial security.
That’s when I said, you have a buy-sell, right? A question they answered with a confused look saying, “yes, but it only covers for the death of an owner. Could a buy-sell agreement help us settle an argument or keep us from losing the operation if he files for bankruptcy?”
Yes; a buy-sell agreement may be the most important tool an owner can possess to protect the operation and ensure long-term value. A well-drafted agreement will prevent unwanted persons from becoming owners, ensure continuity, protect the business from unnecessary litigation, and provide an avenue to a more certain future.
A well-drafted buy-sell agreement may address contingencies like the withdraw of an owner or a legal settlement. A buy-sell can provide appropriate procedures for transferring the business interests for a number of common situations. Buy-sell agreements may also be referred to as business continuation agreement, shareholder agreement, stock redemption agreement, partnership liquidation, or retirement agreement, and cross-purchase agreement.
A buy-sell agreement should be considered for any closely held business with multiple owners.
A buy-sell agreement is a contract that restricts business owners from freely transferring their ownership interests. Typically, the agreement provides that an owner’s interest in the business will be sold (or at least offered for sale) at a specified valuation to the other owners and/or to the business entity itself upon the occurrence of a number of triggering events.
In negotiating a buy-sell, the owners specify the events that trigger a the agreement. Common triggering events may include an owner’s:
- Retirement and/withdrawal from the business
The agreement should specify the method for valuing the business, any ownership restrictions, and the terms/conditions that may have been agreed upon in advance.
Provisions for a buy-sell agreement should be considered carefully. And of course, always consult an attorney for legal advice.