Important Aspects of a Buy-Sell Agreement
If you’re the owner of a business and have at least one business partner, you should have already implemented a buy-sell agreement. If not, you are best served by having one drawn up at your earliest opportunity. The reason for this is protection in the event your partner can no longer serve as an active partner in the business.
However, before you go online and start searching for a basic agreement where you can fill in the blanks, it’s extremely important that you understand exactly what needs to go into such a document, and why those items are necessary. You can’t just fill in the blank and expect the agreement to be binding and automatically serve your needs. Here, we’d like to describe some of the more important aspects of a buy-sell agreement, and why they are necessary for protection.
Reasons For a Buy-Sell Agreement
A buy-sell agreement is important in order for you to be protected in the event your partner retires, becomes ill or disabled, or passes away. The agreement stipulates the buy-out of your partner’s portion of the business.
Required or Optional?
In the event of your partner’s death or permanent disability, the buy-out of your partner’s share should be required. An exception would be if you were close to retirement, where in that case it may be better to simply sell the business. The buy-sell agreement should thoroughly detail the procedure of how to implement the sale under various scenarios.
One of the most difficult aspects of a buy-sell agreement is determining what the buy-out price will be. You’ll need to take into consideration whether the buyout price will be based on one of the following:
- A predetermined formula
- The ownership percentage
- The appraisal.
Most buyouts from a partnership are funded by outside lenders, which makes the transaction easier for all parties involved. However, it’s possible the buyout could be paid for in installments using private or alternate funding. In most scenarios, it’s best to have a signed and dated note from the partner that is secured by collateral beyond the collateral of the business. A business lawyer Memphis TN relies on can be very helpful in drawing up the necessary documentation for this process.
Handling Accounts Payable and Debts
The terms of your buy-sell agreement should specify how the debts and accounts receivables of the business are to be handled at the time of the business buyout. Nonbusiness assets that are owned by the business should also be addressed in your agreement.
From time to time you and your partner may have disagreements on certain major decisions related to the business, and when it happens it could mean trouble. While everyone is certain it won’t happen to them, it’s still best to address the issue in the buy-sell agreement and to outline what would happen if it does. For more information, consult with a business attorney.
Thanks to our friends and contributors from Wiseman Bray PLLC for their insight into business law.