If you have business partners, chances are there will be ownership changes somewhere in the future. You or one of your partners may move out of state, pursue a new business opportunity, become disabled or die, or seek to sell to an outsider.
What happens then? Does your operating agreement or bylaws specify this? Some do, but others don’t. The buy-sell agreement (or buyout agreement) is a contract among the owners that controls the process of buying and selling ownership interests. Think of it as a prenup for your business.
The buy-sell agreement helps insure that you or your partners aren’t forced to work with strangers. It gives the remaining owners the right to determine who they want to work with, and helps determine the price for the buyout. In the case of a death of a partner, the partner’s heirs may not be willing to work for the business, and you may not be able to force them to do so. But you will be paying them their share of the profits.
So who doesn’t need one?
You probably don’t need a buyout agreement if you’re the 100% owner, or your business partner is your spouse or child.
If you’re the 100% owner, you can do these things yourself when the time comes. You may want to consider a buy-sell agreement with an employee who will buy the business upon your death or retirement. This is a great reward for a hard-working employee, and gives your family an infusion of cash upon purchase.
If you’ve got a great, stable marriage, neither of you is probably going anywhere without the other. If either of you dies, the surviving spouse will probably inherit your half of the business. But, if you haven’t been married long or the marriage is on shaky ground, the buyout agreement can save you the money and time of having lawyers litigate the issue down the line.
If you’re in business with a child, or a parent, you probably don’t need one either. You can arrange the transfer through your will or through a trust. But again, if your child dies or wants to leave the business before you, what happens? A buyout agreement can address these terms.