A buy-sell agreement is a business contract that defines the terms of ownership if a business partner leaves the company, is incapacitated or dies. These agreements are also referred to as buyout agreements, business wills, or business prenups. Many businesses benefit from buy-sell agreements, including partnerships, closed corporations, and LLCs. Any company with multiple partners or owners should consider signing a buy-sell agreement. Here are the key clauses you want to include in your business buy-sell agreement.
Name the Parties Involved
One of the first clauses every buy-sell agreement should include is naming each partner and their current stake in the business. You will also need to have each partner sign the contract to make it legally binding.
A buy-sell agreement should include the types of events that make the agreement go into effect. The most common types of triggering events are when a partner:
- Becomes disabled or incapacitated
- Leaves the business
- Files for bankruptcy
- Is terminated
The selling structure defines what the remaining partners will do with the business shares if one owner leaves. There are several types of selling structures that you could utilize, as described below:
In a cross-purchase, the remaining owners purchase the departing owner’s stake in the business.
Also referred to as a redemption agreement, an entity purchase is when the business entity buys the partner’s shares, not an individual owner.
A wait-and-see selling structure allows the remaining business owners to decide whether to utilize a cross or entity purchase once a triggering event has occurred. The business owners may also choose to use a combination of these structures.
One of the primary reasons to have a buy-sell agreement is to define what happens to a partner’s stake in the business after they pass away. Unless otherwise specified in the agreement, the partner’s share in the company could go to a surviving spouse or other beneficiaries listed in their will. The shares could also be sold to an outside entity as part of the estate if there is no buy-sell agreement. To prevent this, you should include what will happen to the partner’s share of the business upon their passing. It’s important to be clear and specific in this clause to avoid vagueness that cannot be enforced.
A buy-sell agreement should include an evaluation of the business as it currently stands and state how the business’ future value will be calculated once a triggering event occurs. Various methods can be utilized to determine the value, including hiring a business appraiser or using a predetermined formula to calculate the value.
Once a triggering event occurs, there is no guarantee that the remaining partners will have enough funds to purchase the departed partner’s shares. To ensure proper funding for the remaining owners to buy the business shares, you’ll want to specify purchase methods in the buy-sell agreement. For example, some business owners may choose to take out life insurance policies on the other owners, so if the partner passes away, they can use the policy’s proceeds to purchase the shares. You should also specify whether the remaining owners can use a payment plan, place a deposit, or use other methods to buy the shares.
Boutty Law Firm —Handling the Legal Aspects of Your Business
A buy-sell agreement is critical to your business succession plan to ensure continuity if a partner leaves or passes away. Entrust the help of an experienced business attorney, like the ones at the Boutty Law Firm, to help you draft a legally-binding buy-sell agreement to protect your business for future generations. Our team is prepared to handle all your business issues, no matter the complexity. Contact us today at 407-710-0461 for a free consultation.