The answer to the first question of “who needs a buy-sell agreement” is relatively simple. If you own a closely held or family business, then YOU NEED a buy-sell agreement. No further discussion necessary. Now, to address the more serious question of – Why??? Because life is complicated and unpredictable. Human nature being as it is can lead to fighting, disagreements and more importantly, disruption of a business upon the happening of certain life events such as death, disability, divorce, bankruptcy or retirement, to name a few events. A properly drafted and well thought out buy-sell agreement provides a fairly clear and straightforward roadmap of how one’s share in a business would be handled upon the occurrence of these and other life events so that the owners and principals can stay focused on ensuring smooth business operations.
Generally speaking, a buy-sell agreement is a contract between the principals and owners of a business that is intended to protect all parties. It specifies what happens with an owner’s share of a company in case of certain life events as well as provide restrictions on transfer of ownership interests. For example, a buy-sell agreement could contain a provision that prevents owners from transferring their interests without offering it to the other owners first; this is called a “right of first refusal” and comes with certain positives and negatives, depending on the particular circumstances. The theme of this agreement is to prevent other owners from being partners with someone’s husband/wife/kids/family members in the case of a death or incapacity of an owner. Accordingly, a buy-sell agreement can specify that upon the happening of certain events like death, disability, retirement, prolonged absence and the like, the remaining owners or the company itself can buy out the ownership interests of the deceased, disabled, retired, or absent partner AND specifies the price. The owners can determine the purchase price or how it is computed in advance in the buy-sell agreement. For example, the owners can set a multiple of earnings, agree to seek independent appraisals, or set a price outright.
Any type of business entity can benefit from a buy-sell agreement– corporation, limited liability company, etc. The larger and more complex a business, the higher the stakes become and the more important having a solid buy-sell agreement in place becomes. The best time to craft this agreement is when there are no problems and everyone is getting along and a business is relatively prosperous or at least stable. This is the time when principals and owners can sit and calmly think through how various scenarios and issues should be treated. Many options can be discussed, analyzed and studied while everyone is amicable and peaceful and no issues exist. There is a lot of flexibility and room for discussion to craft and agreement that makes sense for your business, your industry and the folks involved.
There is no one-size-fits-all solution. Each business and its owners require a unique agreement with careful review to be undertaken to properly provide for its needs.
The attorneys at the law firm of Beress & Zalkind PLLC have extensive experience with these types of agreements and can guide you and your business in its continued success.
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