The Benefits of Having a Business Buy-Sell Agreement
Business succession planning is not just about the death of a shareholder or owner of a business. There are a lot of scenarios that could lead to all or part of your business ending up in the wrong hands. To plan in advance, and avoid potential problems, you may want to consider a buy-sell agreement.
What is a Buy-Sell Agreement?
A buy-sell agreement allows an owner of the business to buy out the interest of another owner, in the event that an owner loses or gives up his or her ownership interest in the business.
Practically, a number of life events can trigger the provisions of a buy sell agreement
- An owner may die, and his or her interest now passes to beneficiaries who you don’t want to work with, or who don’t want to work with the business, or who don’t know or can’t run the business competently
- An owner gets divorced, and his or her interest in the business passes to a spouse as a part of the divorce
- An owner’s interest in the business is taken away by a bankruptcy court on the filing of a bankruptcy
- An owner just decides to walk away voluntarily, but is looking to sell his or her interest in the business to someone you don’t know or don’t want to work with
All of these scenarios can be devastating—you now have new partners, shareholders, or co-owners, who you may not want to work with—and they may not want anything to do with, or know anything about, the business.
What is in the Buy-Sell Agreement?
A buy-sell agreement sets a price at which you (or other surviving owners of the business) can buy out the interest of the owner who is losing or giving up their shares. The agreement itself may have a set price, or it may set a procedure for determining a price—it may say how the business will be appraised, who will appraise it, and any appeal rights, in the event the new owners don’t agree with the appraisal.
Getting Insurance
Worried about having the financial ability to buy out the new owners shares or interest? The good news is that you can take out a life insurance policy on co-owners of a business, so that you have the funds to buy out his or her interest (although that would only work if the owner died, not if the owner files for bankruptcy or goes through a divorce or loses the interest in the business some other way).
Buy-sell agreements also have the benefit of avoiding probate. The interest on the business passes via the buy-sell agreement, meaning the business is not held up while it is entangled in the probate process.
Let us review your business agreements and help you plan for your business’ future. Call the West Palm Beach business litigation lawyers at Pike & Lustig today.
Sources:
investopedia.com/terms/b/buy-and-sell-agreement.asp#:~:text=A%20buy%2Dsell%20agreement%20is,aid%20of%20a%20knowledgeable%20attorney.
wellsfargo.com/the-private-bank/insights/wpu-buy-sell-agreement
