Buy-Sell Agreements: Smart Planning for “What If”
Life happens. Things happen. And often, the things that happen in your life can impact your business.
Life events such as death, divorce, incapacitation, and illness can impact the best-laid plans for managing a company. Even though business owners may have discussed how they’ll handle any sudden events that occur, having a current buy-sell agreement validates that understanding so nothing is left to chance should an owner leave the company.
A buy-sell agreement defines a company’s transition of ownership and voting rights so the disposition of the company is as the owners agree. These agreements should be regularly reviewed and updated; events like marriage, divorce and children reaching adult age, or events like criminal conviction, might necessitate revisions.
The buy-sell agreement typically covers:
Triggering events: Discuss triggering events with your attorney as they draft the agreement. Death, retirement, bankruptcy, substance abuse, fraud, or divorce might cause the agreement to go into effect.
Buyout procedures: Most buy-sell agreements contain a cross-purchase agreement or a redemption agreement. A cross-purchase agreement allows the partners to buy the departing owner’s interests and is often funded by a life insurance policy. A redemption agreement allows the company itself to buy out the departing owner’s interests.
Non-compete clause: If it might be detrimental to your business for a departing owner to compete with the existing company, include a non-compete clause.
Purchase price: The buy-sell agreement should outline the process by which interest will be valued, valuation date, standard of value, and valuation formula.
Savvy business owners prepare for the expected and the unexpected. Discussion about “what ifs” may not be pleasant, but they’re necessary to protect the company.
Dembo Jones is happy to share additional insight about preparing company transitions. Let us know how we can help you plan.