July 27, 2023
When it comes to business, failing to plan is planning to fail. Among the most important aspects of planning for the future of your business is having a Buy-Sell Agreement in place. A Buy-Sell Agreement is a legal document that specifies how an owner's share of a business may be transferred. Without a Buy-Sell Agreement, there could be significant financial, tax, and/or legal issues that arise when an owner dies, becomes incapacitated, gets divorced, goes bankrupt, sells their shares, or retires.
The scenarios listed above are often referred to as “triggers.” Buy-Sell Agreements facilitate the clean transfer of business interests when a “trigger” event occur. The beauty of having a Buy-Sell Agreement is that you get to write the rules ahead of time, helping to ensure a proactive and guided approach to problem solving in situations often full of emotion.
Following a trigger, a crucial and immediate function of a Buy-Sell Agreement is prevention of a pause in management or voting control of the business. If an owner dies without a Buy-Sell Agreement, their shares maybe tied up in probate and/or an ownership dispute for months or even years. During that time, business could be stalled because of the lack of ability to hold a vote on a new manager or any other major business decision. This is especially crippling in industries where time is of the essence.
Some of the most common clauses found in Buy-Sell Agreements address valuation of the business, who can or can’t buy in, and how any sale of ownership interests might be funded. Each of these functions has its own unique and important purpose.
Business valuations come in a highly variable range of complexity. In cases where the company only owns real estate, it may be as simple as getting an appraisal. More complicated situations may call for income-based, asset-based, or market-based approaches. Regardless, having a valuation method established in your Buy-Sell ahead of time can save costly litigation, and undue burden on business owners and their families.
Ground rules regarding who can or can’t buy in are of heightened importance for partnerships. Buy-Sell Agreements can prevent unwanted owners (such as creditors or unqualified owners) and uncertainty. For example, without a Buy-Sell Agreement, a deceased owner’s shares may pass automatically to their spouse who could keep the shares or decide to sell them without the consent of the remaining owners. This opens the door to the highest bidder, regardless of qualification or approval of the other partners. A Buy-Sell can set out mutually acceptable parameters, which ensure compensation of the deceased owners’ family and retained ownership and control of the business by the other partners.
The scenario above highlights the benefits of having a plan for the funding of any purchase or sale of interest. Proper planning can ensure adequate funds are available for an in-house buyout, while at the same time preventing or minimizing tax implications for the exiting partner.
If you are a business owner, we recommend consulting your attorney about getting a Buy-Sell Agreement in place. Our team at Rembolt Ludtke has overseen thousands of these arrangements, making us well suited to craft an agreement that meets your unique needs and accomplishes your goals. Please contact us if you would like to discuss implementing a well-drafted Buy-Sell Agreement for your business or if you have any questions.
This article is provided for general information purposes only and should not be construed as legal advice. Those requiring legal advice are encouraged to consult with their attorney.
