If you own a business with one or more co-owners, or are in the process of forming such a business, you should strongly consider adopting a buy-sell agreement.
A buy-sell agreement is a binding contract between co-owners of a business that controls when an owner can sell their interest in the company, who can buy an owner’s interest, and what price will be paid for the interest. A buy-sell agreement is triggered when an owner leaves the company due to one or more circumstances, such as retirement, death or disability. Other circumstances that trigger the terms of a buy-sell agreement may include divorce (to help avoid a co-owner’s spouse from gaining an interest in the company) and a co-owner’s personal bankruptcy (to help prevent the business from getting bogged down in bankruptcy court).
The buy-sell agreement should contain detailed provisions regarding the valuation of an owner’s interest when he leaves the company. This may include the hiring of one or more independent, professional appraisers to value the interest or the use of a specific valuation formula to determine a price using the company’s past financial statements. The existence of these provisions can be very helpful in avoiding valuation conflicts when a buyout occurs.
The buy-sell agreement should also determine the payment structure for a departing owner’s interest. It is often a good idea to incorporate flexible payment terms in this regard. For example, a buy-sell agreement may allow for a down payment of some portion of the buyout price followed by installment payments over a certain period of time at a reasonable interest rate. Acquisition of an insurance policy to cover the payment of an owner’s interest upon death or disability may also be considered.
If you think a buy-sell agreement can help in the orderly transition of your business, you should discuss the matter with your co-owners and an attorney experienced in this area of the law.« Back to news