Do you need a buy/sell agreement?January 30, 2017
If you are asking this question, the answer is almost certainly YES. So, let’s start with “what is a buy-sell agreement?” In short, a buy-sell is an agreement between you and the other owner(s) of your business that lays out what would happen if you or another owner no longer wants to or no longer can continue owning the business.
Who needs a buy-sell agreement? Basically anyone with a partner. If you are not the sole owner of your business and you care about what would happen to your share of your business or your partner’s share, you must get a buy-sell in place.
The two most common times a buy-sell matters is if your relationship with your partner goes south, or if one of you dies. Let’s look at those two scenarios a little closer:
1. One of you wants out. Whether it be because your partner lost his passion or the two of you don’t get along anymore, or something else entirely, it is very possible that one of you will want out of the business at some point. Without a buy-sell in place, your business partner can most likely sell his or her interest in the business to anyone. That means that you could end up being partners with the highest bidder. Do you like the buyer? Doesn’t matter. Now you’re partners. If you have a buy-sell, your agreement would stipulate what happens if one of you wants out. The most common setup is that the partner that remains in the business has the right to purchase the departing partner out.
2. One of you dies. Do you want to be partners with your partner’s spouse? What about his or her children? Without the proper planning in place, that’s exactly what will happen if one of you dies. It’s not fun to think about, but bear with me. Suppose you die. If you have no planning in place, your spouse and/or children (depending on your family setup and what state you live in), will inherit your business interest. If you aren’t married or don’t have kids, it will be your parents and/or siblings. Do they even want to operate your business? Many times the answer is no. You know what would make their lives much easier? A big pot of money. That’s something a buy-sell agreement can provide. The agreement can essentially obligate the business to buy your ownership interest out if something happens to you. Many times that purchase is funded with life insurance that the business carries on you. That way, the business doesn’t have to maintain a huge cash reserve in case something happens to you.
So, if you have a business partner, you need a buy-sell agreement. The money you spend getting that agreement in place pales in comparison to the money, time and grief that will result if you need the agreement but don’t have it. Buy-sells are a funny thing- you do not need it until you need it, and then it’s too late.
Start smart. If you want to discuss your buy-sell with a business attorney, feel free to contact me.