A buy-sell agreement helps to do main things: One, continuity of the business, and two, resolve business partner disputes
In the first situation, a buy-sell agreement helps the business continue in operation in case the owner passes away, becomes disabled, or is otherwise unable to sell the business. A buy-sell agreement can force a business owner’s estate to sell the business to a third-party who’s already agreed to buy the business. This allows the estate to reap the financial rewards of selling the business, but also puts the business, it’s customers, and employees in a position where the third party can continue to operate the business.
In the second circumstance, if the business is owned by more than one person, the business partners may have a buy-sell agreement that allows a partner to exit the business in case a dispute arises, if one business owner no longer wishes to be in the business, or if one business partner falls on hard times (e.g. files bankruptcy or is convicted of a felony).
In summary, if the business is owned by one person, a buy-sell establishes a plan for continuing the business past that person’s ownership. If the business is owned by multiple parties, a buy-sell is even more important. A comprehensive buy-sell can save the business from partner disputes, or allow partners to exit the business on friendly terms.
What should small business owners include in a buy-sell agreement?
A buy-sell agreement should address the following points:
- Identify who is buying and who is selling
- Identify the exact assets that are being sold
- The circumstances that trigger the buy-sell agreement (death, divorce, conviction of a felony, bankruptcy, a certain age, etc)
- A method of valuating the business (such as relying on the company’s CPA, agreeing to a set value, or relying on the opinion of a business valuator).
- The procedure that the parties need to follow to effectuate the transaction
- How to resolve a dispute if it arises
- How to cancel the buy-sell before it’s triggered