If you’re in business, you may have heard of buy-sell agreements or buyout agreements, which are predominantly used in the purchase/sale of a business but may also be useful in the case of death or retirement. As a business owner, you may wish to consider having one in place before it’s needed. However, as with any legal document, it’s wise to have a professional to help you put together, revise, or even just review it so that you have a clear understanding of the topics it should cover. As for your own review, or while considering creating one of these agreements, here are some important points to consider:
1 – When all or part of the business can be sold – This question may arise when a third party wants to obtain an interest in the business when an owner wants to cash in, or if financial decline hits and bankruptcy becomes a threat. It’s important to keep in mind that if party leaves when finances are on the decline, the remaining parties may be left to deal with a mess. For this reason, you should identify the point(s) at which one owner can sell or transfer his or her interest, so as to lessen any damage to the other parties and protect against frequent sales that may cause turmoil. It’s advisable to make these determinations before questions arise and have them set out in the company’s operating agreement.
2 – Who can buy into the business – Allowing your competition, someone inexperienced, or even someone you don’t personally know to purchase your business may be a risky move. Don’t rule out the idea that it could become an eventuality and be sure to include provisions to address this question in the company’s governing documents. If you’d like to stay in business with co-owners you find agreeable, then be sure to include provisions that make that a reality.
3 – What happens in the case of death or retirement – While having a co-owner of your business leave isn’t ideal, it’s an eventuality that you should keep in mind. In so doing, it’s best to clearly highlight what succession plan is in place and/or provide an option for transferring an owner’s share at the time of his or her departure so that you can continue to operate and the business and, if necessary, move on to find a new business partner separately.
4 – Business Valuation – When considering a transfer of your business, it’s important to value the assets being sold. Knowing what value a share holds not only assists those wanting to cash out but can also help when you think of your business in terms of the investment you’ve made and be more mindful about how this balance is altered. Knowing what investment you have in your business is a smart move to make.
Regardless of your stage in business, if you own the business jointly with other parties, resolving these issues early on is everyone’s best interests. A business attorney can help with that resolution by ensuring that it is properly documented so that you can move forward quickly and smartly if and when a succession issue arises.
The information presented here is for general educational purposes only. It does not constitute legal advice and does not create an attorney-client relationship.