For any business that has more than one owner, Buy-Sell Agreements are critical. In particular, if one of the owners becomes disabled, dies, retires, divorces, or is otherwise terminated from activities of the business, the Buy-Sell Agreement will determine how ownership will proceed.
A Buy-Sell Agreement defines the terms under which one owner will buy out another. Of course, if this is done at the start of a business, before any triggering event occurs, then the parties are equally motivated to make reasonable arrangements. Once an event occurs, such as disability, retirement, or any other desired departure from the business, then one side has the desire to set a minimum price, and the other side a maximum. Such disputes can often result in litigation that dissolves the business, or activities that force the business into bankruptcy.
A Buy-Sell Agreement can be in three different forms. First, co-owners of a business can decide upon a set amount that will be paid upon purchase of one another’s interests. If so, the amount shall be revisited annually, and appropriate insurance or reserves should be obtained in order to fund the buy-out. The second option is to identify a formula to determine the price at the time of the triggering event. As a third option, the parties can set up a procedure, such as binding arbitration, designation or appraisers, or some other method to arrive at a purchase price.
Additionally, the parties should decide whether the purchase price is to be paid or in installments. If the price is to be paid all at once, a funding mechanism must be used. Otherwise, payment could potentially cripple the business. Installment arrangements should be specific as to duration, interest rates, down payments and any other terms important to the parties. Absent of a Buy-Sell Agreement, partners may find themselves with other partners who are not wanted. In other words, if a partner dies, his or her spouse, children, or other beneficiaries may end up owning a portion of the business. Same scenario can result from a divorce, where an unwanted spouse is awarded some portion of ownership in trust in the business. Buy-Sell Agreements are critical to prevent such unwanted outcomes.
If you have questions about an existing Buy-Sell Agreement, or you have the desire to assemble one, please feel free to call our office for input, guidance, or drafting. We look forward to assisting you.