In business, the road to success is seldom clear or easy to travel. While partnerships can be incredibly beneficial, they also have their challenges. When unforeseen circumstances or disagreements happen, a buy-sell agreement can come to your rescue.
A buy-sell agreement is a contract that’s commonly part of the larger agreement between the partners or multiple owners of a business. In effect, a buy-sell agreement outlines the conditions under which an owner’s share of the business can be sold or transferred based on certain “triggering” events, like an owner’s death, long-term disability, divorce, bankruptcy, conviction for certain crimes or even their desire to retire.
A buy-sell agreement also outlines the terms of the sale, since it typically dictates how the business will be valued so that the price for the departing owner’s share can be properly set. It may also address how the buy-sell agreement is to be funded, such as through installment payments or insurance policies. This helps avoid disputes that can drag a business and its reputation down.
Buy-sell agreements are tools that help secure the company’s future
More than just creating exit routes for departing business parties, buy-sell agreements also help create a sense of continuity. When a co-owner or partner leaves a business, that can leave everybody from shareholders to employees feeling very uneasy about the company’s future.
A properly-drafted buy-sell agreement helps make sure that the departing party’s share doesn’t end up in “the wrong hands,” with someone who will disrupt the company’s atmosphere, culture or operations. This is particularly desirable in closely-held businesses where the owners want to control who can become a partner or shareholder so that they can protect their collective interests.
Good buy-sell agreements can make changes at the top go very smoothly and quietly. An orderly transition that doesn’t devolve into chaos minimizes the risks for all stakeholders – and the risks to the business itself. The better defined the terms of a buy-sell agreement, the better it serves as “preventive medicine” against a lot of emotional upheaval and costly legal battles.
