Buy-Sell Agreements – What is the Purpose?
A buy-sell agreement, otherwise called a buyout agreement, a business will, or a business prenup, is an agreement that stipulates what is to become of a share of a business in the event that an owner dies, retires, or leaves the business for any reason. Too many sole proprietorships, closed corporations, and partnerships operate without this type of agreement in the assumption that once one owner leaves his or her share will be allocated fairly between the remaining shareholders, partners, or members.
This assumption can be costly. It is not uncommon for surviving spouses to step up and wish to claim the deceased’s portion of the business, or for the bank to swoop in because the former partner filed for personal bankruptcy. It is also not uncommon for remaining members to fight over who gets more of the deceased partner’s share. A buy-sell agreement can help prevent these types of scenarios and therefore, prevent expensive business litigation down the road.
The Dangers of Operating Without a Buy-Sell Agreement
We briefly touched on the pitfalls of not having a buy-sell agreement above, but there are several other consequences of operating without a buy-sell agreement that go beyond the business ending up in the wrong hands. If you do not have a buyout agreement in place, one or more of the following is bound to occur at some point throughout the life of your business:
- As mentioned above, a portion of your business could end up in the wrong hands, such as a bank, an angry ex-spouse, or an immature son or daughter;
- If you are forced to go to litigation, your business may end up dying while surviving heirs and/or owners contest their rights and entitlement to the now available share of the business;
- Without appointing a potential buyer for your share of the business ahead of time, you risk you or your inheritors forfeiting fair compensation for your portion of the company when you do exit; and
- If you or your beneficiaries are forced to locate a potential successor on short notice, you risk having to sell your share of the business for far below market value.
A Mobile business and corporate litigation attorney can help you craft a business prenup designed to help mitigate the above risks and make a partner’s exit, retirement, or death as painless as possible.
Does YOUR Business Need a Buyout Agreement?
If you operate under any type of entity other than a sole proprietorship (meaning you are not the sole member of your organization) then yes, you and the other members likely need to sit down and draft a buy-sell agreement. However, Investopedia details a few situations in which a buy-sell agreement is absolutely necessary:
- You own a portion of a business and wish to place restrictions on to whom or what other members can sell their interests;
- You wish to establish a fair value of each member’s share just in case a business dispute erupts between owners that results in one member exiting and wishing to sell his or her share to another member;
- You want to specify that remaining owners must buy a portion of the interests of deceased or exiting shareholders; and/or
- You want to stipulate that owners may only sell their shares of a business to remaining members so that the remaining members may retain control of the company in the event a shareholder dies, becomes incapacitated, or leaves the business for any reason.
Work With an Experienced Alabama Business Litigation Attorney
A buy-sell agreement is often as important as a business operation plan, as it dictates what is to become of a portion of your business in the event that a co-owner passes away or exits the company. Without this type of plan in place, you risk letting your business fall into the wrong hands, going through costly litigation that could put your business under water, or you or your heirs forfeiting fair compensation for your portion of the business should you be the one to exit. Though devising a sound business prenup takes some time and thought, the resources you expend will be well worth it when it comes time to enact the agreement. That said, you can make the process easier on yourself by working with an experienced attorney who understands what goes into a strong buyout agreement that protects all owners’ interests. Contact Cloud Willis & Ellis today to discuss your contract needs.