Most successful businesses can attribute their accomplishments to solid planning, but what happens if a business partner suddenly leaves, becomes incapacitated or retires? This is one aspect of business that even the best-prepared companies sometimes overlook. Buy-sell agreements can outline how these events will be handled and protect the business from major problems.
Here is a closer look at what a buy-sell agreement is and how it works.
What is a Buy-Sell Agreement?
A buy-sell agreement is a legally binding agreement that is set up between two business partners establishing how business interests will be addressed in the event one partner unexpectedly leaves. This can help to protect a business, as well as its employees, clients and other stakeholders.
The agreement will clearly outline the transition for ownership of the business in these circumstances. It may stipulate that the remaining business shares held by the partner who leaves must be sold to the business or certain members. In situations where a partner in a business passes away, their estate could be legally obligated to sell.
Without a buy-sell agreement, a business could find itself in a situation where a former business partner’s spouse ends up becoming a co-owner or their children end up being part of the management team.
In some cases, a bank could end up owning a stake in the company. In any of these situations, business owners could find themselves with partners who are not fully versed on how the business operates or who are not as invested in the business’s success as their predecessors.
There are a range of events that can trigger a buy-sell agreement, including retirement, divorce, bankruptcy, permanent disability, and employment termination or resignation. These agreements are typically used in businesses where there are concerns about a critical partner leaving, such as law firms, business partnerships, doctors and dentists offices, and restaurateurs.
How Do Buy-Sell Agreements Function?
A buy-sell agreement essentially serves to safeguard the longevity of a company in the event that a key member leaves. It establishes a process for moving on without the individual while protecting the business from external forces.
Buy-sell agreements have a series of provisions explaining how various situations will be approached. They also contain the typical components of a contract, such as definitions and acknowledgments.
The main elements of buy-sell agreements are:
- Identification of the parties and triggered buyout event: This section should be as specific as possible to avoid disputes.
- The company’s valuation: This determines how the value of one partner’s stake in the company will be calculated. In some cases, this calculation may be entrusted to a valuation expert.
- Resources for funding: A life insurance policy can give other partners access to the funding needed to buy out disabled or deceased co-owners.
- Tax-related considerations: Qualified business consultants or tax advisors can provide guidance on the tax implications of the agreement.
The Benefits of a Buy-Sell Agreement
Here is a look at some of the reasons a buy-sell agreement is necessary for ensuring your business’s longevity.
Creating an Exit Plan for Business Partners
Any time a partnership breaks up, there is a potential for things to become contentious. In many cases, former partners may struggle to agree on the terms of their split, which is why establishing them in writing from the beginning can help avoid headaches and serious financial risks.
Setting a Fair Value Price for Business Shares
Buy-sell agreements set the fair value for a partner’s share in the business. This can help to avoid disagreements about the fairness of buyout offers as the figures will be established in advance. This means that a departing business partner or their next of kin will not be able to demand more money than their share is worth.
Establishing a Business Continuity Plan
Without a buy-sell agreement in place, your business operations could suffer a serious disruption in the event of the illness or unexpected death of a partner. This plan ensures that everyone understands who is responsible for what and how the business can continue despite the obstacles that arise.
Keeping Business Interests With Surviving Owners
A buy-sell agreement will stipulate who is entitled to each partner’s share of the business should they no longer be able to be a part of it, preventing disruptions or the potential dissolution of the company should a partner’s heirs wish to sell it.
Set Up a Buy-Sell Agreement as Early as Possible
If your business does not already have a buy-sell agreement in place, it is important to establish one as soon as possible.
Although this is something that can be set up at any point in a business, it is better to address it early in case something unexpected happens to one of the partners. In addition, this process is far smoother if it is addressed before the business has grown.
Contact Business Benefits Group (BBG) for More Information
The consultants at Business Benefits Group (BBG) can help your business navigate the complex process of setting up buy-sell agreements. Our experts can identify creative solutions that benefit all parties. Contact us today to learn more about our services.