Small business owners are busy managing the day-to-day requirements of running a business. They may not consider what would happen if the business owner dies or becomes incapacitated, which can jeopardize the business and financially devastate the continuing owners. Buy-sell agreements establish procedures for the business to continue after the owner passes away or leaves, protecting the business and the continuing owners.
Discuss Your Case With a Buy-Sell Agreement Attorney
The best time to execute a buy-sell agreement is when you start your company. If you do not currently have a buy-sell agreement, there is no time like the present to execute one and protect yourself and your business. Without a buy-sell agreement, your business is vulnerable to unforeseen events, such as the sudden incapacity or death of a partner or owner. Contact our business contracts attorney today to learn more about our buy-sell agreement services.
The Benefits of a Well-Drafted Buy-Sell Agreement
Many benefits come from executing a buy-sell agreement. By doing so, you will establish the fair value of each partner’s share of the business. Placing a value on each owner’s interest will be important if a partner wants to remain in the company after another partner’s exit. It will help forestall disagreements about whether a buyout offer is fair. You will also be able to develop an exit plan for business partners. There are many reasons why a partnership can break up, ranging from disagreements to one partner wanting to move on to another pursuit.
Creating an agreement will reduce the financial risk and headaches by planning. You’ll also be able to keep business interest with the surviving owners by limiting who is eligible to your share of a business if you or another owner can no longer take part in it. Finally, buy-sell agreements allow your business to create a business continuity plan and the case of unexpected illness or death.
Essential Elements of a Buy-Sell Agreement
Buy-sell agreements should address the valuation of the business at the time of sale. The valuation needs to consider assets, liabilities, and revenue. It should also estimate the worth of the business’s intangible property, including its trade secrets, trademarks, patents, and customer goodwill. The buy-sell agreement should assign a percentage of ownership to each partner based on their contributions to the business, with reliable benchmarks that they can achieve.
The buy-sell agreement should also consider all of the triggering events that could result in a partner needing to cell. Divorce, disability, death, retirement, bankruptcy, can all create a need for one partner to sell his or her shares. In some cases, a partner will simply desire to leave the company and move on to a different project. The buy-sell agreement should include a list of all the reasons a partner would lead and address that partner’s rights and obligations.
Grounds for Termination of the Buy-Sell Agreement
Perhaps a partner would like to leave the business because it is being poorly run, the other partners have changed the company’s mission, or his or her rights have been violated. In these situations, the existing partners shouldn’t continue to be held to the buy-sell agreement’s terms. The agreement should specify which grounds are acceptable justifications for the partners to terminate the agreement.
Allowing a Spouse or Heir to Take Interest
Buy-sell agreements are especially important in family business succession planning. Many family businesses do not have a buy-sell agreement, and their business can be hurt to a significant degree when the founding family member passes away unexpectedly. Sometimes family members assume that the spouse or children will automatically take the decedent’s interest in the company because they want the company to remain a family business. However, disputes can arise about who should take over the company.
Perhaps the oldest child isn’t well suited to run a company or doesn’t want to run the company. Neither the remaining company owners nor the heir may wish to own the deceased owner’s interest. They may want to sell the company shares or membership interest to the company through redemption or the other owners through cross-purchase because the family’s estate is the family business. The attorneys at Woods Lonergan can help you draft a buy-sell agreement that considers all of these potential issues.
We can discuss a plan for your business should you retire or pass away that would allow your family members to continue working and the business to continue making a profit during the interim. You can also choose to appoint a successor, or detail how you would like a successor to be appointed. Taking these actions now can prevent possible disputes between family members and ensure that they have the means to continue your family business after you’re gone.
Eligible Buyers and Financing
Before signing a buy-sell agreement, you should consider which type of people or companies you would allow buying an interest in the company. The potential buyer should be a person who wants to guide your company to greater success. The existing partners should have the right to veto a potential buyer who they feel doesn’t share the vision for their company or who would simply like to sell off the assets later. In some cases, a partner will want out of the company but won’t be able to find an acceptable buyer.
In that case, the remaining partners will need to buy out the partner who wishes to leave. Depending on the business, buying out a separating partner can be too expensive for the other partners. The buy-sell agreement should include a detailed plan for financing that would prevent the remaining partners to suffer financial hardship that would impair the business’s operations.
Contact Our New York City Buy-Sell Agreement Attorney Today
At Woods Lonergan, we have helped many businesses create effective buy-sell agreements. We understand that buy-sell agreements are a crucial aspect of any business partnership. The financial impact of a partner withdrawing can hurt your business, your employees, and your own interest. Without a buy-sell agreement, your business is vulnerable to unseen events. If you would like to discuss creating a buy-sell agreement for your New York City business, contact Woods Lonergan as soon as possible.