Change is inevitable in any endeavor, especially in business. If you have just started a small business with one or more partners, there is the possibility that there could be a change in that partnership or that someone could leave in the future. Though such shifts can be something of a hassle to deal with, their effects can be effectively managed through the use of a buy sell agreement, which allows everyone involved to make plans for if and when someone leaves. Read on to learn why it is a good idea to engage with these documents sooner rather than later.
Defining a Buy Sell Agreement
Though the name is somewhat misleading, buy sell agreements do not deal with purchasing or selling actual partnerships. In most cases, a buy sell agreement (also known as a buyout agreement) serves as a contract agreed upon by all of a business’s partner owners, and irons out details regarding future ownership and changes in the partnership. Because this document is a binding contract, you can choose to include it in the partnership agreement or to have it stand on its own. In the writing, be sure to include details such as these on business decisions:
•The value of an ownership interest in the event of a partner leaving.
•Whether it should be possible to buy out a partner upon his or her departure.
•The circumstances that trigger a buyout.
•Who is allowed to buyout a partnership interest upon a partner’s departure.
To put the buy sell agreement in another context, it is similar in principle to a prenuptial agreement. Though things might be going smoothly at the outset, unforeseen events can happen that have the potential to shatter a partnership. It is therefore best for all parties to be prepared.
The Coverage of a Buyout Agreement
A thorough buyout agreement will highlight the circumstances under which a partner buyout is possible. These are the most common events:
•Divorce settlement that would grant partial business ownership to a partner’s spouse
•Disability, incapacitation or death of a partner
•Partner filing for bankruptcy
•Debt foreclosure from a partnership interest
Reasons for Establishing a Buyout Agreement
While a buyout agreement functions much like a prenuptial agreement in the sense of security it adds to a business partnership, it also serves as a reminder for your existing partners about your agreement in handling a buyback or sale of an ownership interest when a change occurs. If you do not take the time to establish a buyout agreement, the partnership could be legally dissolved if one of you chooses to leave the state to create another, separate business. In this case, you and the remaining partners would be forced to divide all of the business’s assets and begin again from square one.
Even if your business is not in a situation in which the partnership could end, there might be disagreements between you and your partners regarding the price of an ownership interest and who should be permitted to purchase it. Legal battles have resulted from disputes over ownership interest valuations when the time comes to sell one, because the remaining partners did not take the time to draft a buyout agreement long beforehand. Before you know it, you have expensive litigation bills and business delays to deal with.
Additionally, comprehensive buyout agreements also have sections dedicated to outlining the kinds of outside parties that are able to buy their way into a partnership. Without an established buyout agreement, it is possible that you could find yourself running your business with an individual you don’t like.
When business partners start squabbling over the valuation of each other’s shares, the operations as well as the entire mission of the business are put in jeopardy. Instead of allowing this to happen, be proactive with a buy sell agreement.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.