Buy-Sell Agreements and thinking about the end of your business
Are you thinking about starting a new business? Have you already started it? Many business owners start businesses without ever thinking about the end. When they get to the end, they are left unsure of what to do and sometimes without great options. Planning an exit strategy ahead of time will save many business owners a lot of time and stress.
One tool to assist with how you will pass on your business is the buy-sell agreement. There are a variety of ways to draft buy-sell agreements. The main idea of a buy-sell agreement, however, is to have a plan about how the owner’s interest will be sold or transferred upon some triggering event. A triggering event can be almost anything. Some types of triggering events include termination, either voluntary or involuntary, of one of the owners, death, disability, retirement, or divorce.
Keep in mind that if there is no buy-sell agreement upon death, the deceased’s ownership interest will pass on to the decedent’s heirs. This may not be desirable. The same holds true for a divorce: a court could award a soon-to-be ex-spouse and interest in the business if no buy-sell agreement exists to direct otherwise. Having ex-spouses running a business may be a very undesirable result.
Ways for the owner’s interest to transfer include the following: business buys and owner sells the owner’s interest upon the triggering event. Alternatively, the buy-sell agreement could require the owner to sell and the remaining owner’s to buy the departing owner’s interest. Another method is to combine these two types of buy-sell agreements: the owner sells first to the business, but if the business declines the remaining owners must purchase the departing owner’s interest. Some buy-sell agreements provide for an escrow agent who will obtain and maintain insurance policies on the owners in the event of death or disability.
A buy-sell agreement can be put into either the operating or by-sell agreement depending on the type of business or it can be a stand-alone document. However, buy-sell agreement’s can get complicated. If you think your business would benefit with a buy-sell agreement, it is advised that you contact a lawyer.