Why (and How) You Should Craft a Buy-Sell Agreement

Why (and How) You Should Craft a Buy-Sell Agreement

By DeAnn Chase November 09, 2018    Category: Business Law     Tags: buy-sell agreement

Why (and How) You Should Craft a Buy-Sell Agreement

Whether you’re starting out with partners or considering adding new people to the ownership structure of your already-successful business, one document you want to make sure you have in place is a buy-sell agreement. An incredibly common source of lawsuits is partnership disputes, and these often arise when someone decides that they want to leave the business. Having a buy-sell agreement in place will ensure that you’re not blindsided when something like this happens.

Why You Should Have a Buy-Sell Agreement in Place

It’s a common enough story. Two friends know that they work really well together, and they decide that they want to leverage that great working relationship towards opening a store (or a dental practice or a gym or a construction firm or any other sort of business). Things go great! The business has grown into a successful and profitable entity, with a weighty client book and a number of employees.

Then, tragedy strikes. One of the partners gets injured or becomes ill and can no longer work. Or, the unthinkable, one of the partners dies. Now the remaining partner and the business are stuck on what to do with the leaving partner’s interest, and in the worst case, the probate court has no guidance on what to do with the deceased partner’s shares. Even without a falling-out between these two friends, they’ve still found themselves in a situation where the lack of a buy-sell agreement can destroy this fantastic business that they’ve spent so long building. Planning ahead by putting together a buy-sell agreement can remove this uncertainty and is an important step in future-proofing your business.

Buy-sell agreements can also be an important part of your succession plan, since they’re a way for you to structure a future sale of your business to your employees or a senior manager. Knowing up front who is allowed to buy into the business is essential for protecting the continuity of the business and the security of your employees, your customers, and other owners. Even if your succession plan changes over time, putting this document into place early protects you from the unexpected.

Get Your Ducks in a Row With a Business Valuation

One key term of a buy-sell agreement is the business valuation clause. This clause sets forth how to calculate your business’s value. There’s a number of ways this could be structured. For example, the clause could lay out a specific formula to be used to set the value of the business at a specific time, or it could be an agreement to hire an expert to determine value or to base the value on specific metrics. It’s important to set the value of someone’s ownership interest up front so that there is no argument later about how much someone’s share of the business is worth. In some cases, especially in businesses that have investors, having the business valued regularly by an independent expert can also give everyone reassurance that you’re on the right track.

The choice of what valuation method to use is one of the most important decisions to make when crafting a buy-sell clause. The particular method used can dictate a lot about the basic running of the business, even down to whether the process of valuing the company is a piece of cake or a nightmare. This decision can also have tax implications, as well as implications on whether it’s feasible to plan on the sale of a business funding your retirement. Your attorney and your tax advisor can help walk you through which valuation method is right for you and your business.

Then, Determine and Set the Rules

Business buy-sell agreements should also include a number of other important rules. What is included and what the terms are will depend on the specific situation, and your business attorney can help you draft an agreement that works for your business. A few things to consider before meeting with your attorney include whether you would like to limit who can buy into the business, how you would like sales to be funded, and what events should trigger the sale of the company (for example, buy-sell agreements can be structured to prevent outside parties or lenders from taking control of the business).

There’s really no downside in putting together a buy-sell agreement. These agreements can always be changed in the future when and if your plans change, and until those plans change, they serve as an important protection for your business. Besides, it’s always easier to put something like this together when everyone is happy, in agreement, and the business is rolling forward smoothly than it is to attempt to craft an agreement after a problem occurs. The team at Chase Law Group, P.C. can help you create a buy-sell agreement that works for your business. Give us a call at (310) 545-7700.