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When is a Buy-Sell Agreement Necessary?

The term “buy-sell agreement” is somewhat of a misnomer. It makes it sound as though it is an agreement for some sort of purchase or sale. In reality, a buy-sell agreement is a legal agreement between a business and business owners which stipulates how certain events will impact the management and operation of the business. These events often include things such as a death, divorce, or departure of a business partner. When is it necessary for a business to have a buy-sell agreement in place? We will discuss this in more detail here.

When is a Buy-Sell Agreement Necessary?

The truth of the matter is that a buy-sell agreement can be a critical legal agreement that every business should have in place to protect the interests of the owners and the continued well-being of the business. If you have a business without a buy-sell agreement in place, you should plan on creating one as soon as possible. Ideally, however, it is best for you to put a buy-sell agreement in place as soon as the business has been established. Even businesses with single owners can benefit from a buy-sell agreement working in tandem with its business succession plan.

The most effective buy-sell agreements will anticipate the needs of the owners and the business. The terms of such agreements should address the following questions:

  • When can the business dispose of an owner’s interest?
  • Can the other business owners buy the interest of an existing owner prior to the interest being offered to an outside party?
  • How much should be charged for the buying of an owner’s interest?
  • Who will the remaining owners accept as a substitute owner?

In essence, the buy-sell agreement sets forth what will happen to an owner’s interest should he or she choose to or need to leave the business or otherwise forfeit his or her business interest. Such a need may arise under a number of circumstances, including when a business partner:

  • Dies
  • Divorces
  • Becomes disabled or incapacitated
  • Files bankruptcy
  • Retires
  • Wants to leave the business

These are possibilities for any business owner and that is why buy-sell agreements can be necessary for a business to have in place. Having the agreement outline what can and should happen under these kinds of circumstances will create stability in some of the major transitions a business may undergo. It will help establish continuity in the management and control of the business and create job stability for the owners who stay with the business.

A buy-sell agreement can also help prevent the ownership interests of a deceased owner from being trapped in probate proceedings. Instead, pursuant to the buy-sell agreement, the remaining owners will be able to promptly purchase the deceased owner’s interest in the business. Furthermore, a buy-sell agreement that establishes the value of the owner’s interest will prevent expensive and time-consuming litigation from ensuing over what the value of that owner’s interests should be.

Business Law Attorney

In reality, if you want your business to be protected from upsets in ownership, litigation over the transfer and sale of ownership interests, and other major transitions among owners, then a buy-sell agreement is necessary. Woods Lonergan can help you put this agreement in place. Contact us today.