How and When to Use Buy-Sell Agreements

When you start a business with someone, you may, optimistically, believe that you and your partner, or other owner, or manager, will be in business virtually forever. But forever doesn’t often look like we think it does, and that means, there are often scenarios where someone who owns a company, loses their ownership interest in the company.

If that happens, and you are the other owner, you can find yourself in business with a stranger, or someone you don’t want to do business with, or someone who may have no idea what to do with, or how to run, the business.

Using a Buy-Sell

This is the purpose of what is known as a buy-sell agreement. A buy-sell agreement allows a business owner to buy out the interests of other owners, in any situations where those other owners’ interests may end up being transferred to someone else.

Involuntary Transfers

Transfers of a business’ owner’s interest in a business can happen in a number of ways.

Imagine that someone gets divorced, and their spouse, pursuant to the divorce, now has an ownership interest in the business.

Imagine that someone files a personal bankruptcy, and his or her interest in the business is now owned by creditors.

Or it can just be that the other owner wants to retire or go into another business, and sees his or her interest in your business as having value. A sale and a retirement are imminent.

All of these situations can leave you in business with total strangers.

A Buy-Sell Can Help

In the case of bankruptcy, where the bankruptcy trustee automatically gets the debtor’s interest in the business immediately and by law upon the filing of the bankruptcy (possibly leaving you in business with a bankruptcy trustee), the buy-sell agreement can avoid that from happening; the interest in the business never becomes part of the bankruptcy estate, because it is transferred automatically and prior to, the bankruptcy filing.

In the case of divorce, your buy-sell agreement may supersede the other business owner’s  spouse’s interest in the business (although the money you pay to the now-divorcing other owner, could become part of his or her assets subject to division in the divorce–but at least the spouse is not running your business).

Even in the death of a business partner or co-owner, because the buy-sell agreement is immediately triggered, the business interest would avoid the probate court.

All of these situations allow your business to keep running, without interruption, with the business owners and partners you want to be in business with.

At What Price?

Of course, a buy-sell agreement has to have a purchase price that is set and established. You can either (1) set a price upon the buy-sell’s execution, or (2) just list a method that determines the price when and if the buy-sell is in effect.

The former is good because it gives you some definite dollar amount, and makes the transfer process quicker; you don’t need any appraisal at the time that the business interest is being transferred. Everyone knows what they have to pay, and what they are receiving.

The latter is better because it accounts for the business’ current value, at the time the buy-sell agreement goes into effect.

Need a buy-sell agreement? Call our West Palm Beach commercial litigation attorneys at Pike & Lustig for help.