A company typically prepares business plans for the coming years. Some events that have a strong impact on your business are difficult to forecast, like death, divorce, or retirement. Buy-sell agreements may take some of the uncertainty about at least one part of your company’s future. However, if you don’t already have a buy-sell, you may be unsure of what exactly it does.
Buy-Sell Agreement Basics
Business owners sign many contracts, legal documents, and general business agreements during the course of business. A buy-sell agreement has a special purpose we will look at more closely in the next section.
First, though, let’s look at the fundamentals. Buy-sell-agreements are legally-binding documents related to ownership interests. Other names for this document include buyout agreement, business Will, or business prenup.
Two of the most common forms of a buy-sell are:
- The Cross-Purchase Agreement – where one partner exits the company and the other partners buy his or her shares.
- The Entity-Purchase Agreement – where the company itself buys the exiting partner’s business interests.
This agreement by itself is not used to buy or sell shares in a business. Although buying and selling company shares happens, it is only after a triggering event.
What Buy-Sell Agreements Do
Here are three general examples of how a buy-sell agreement may be used.
Death: XYZ Company is owned by George, Elaine, and Sam. When George passes away, will his shares become part of his probate estate? If so, the delay could affect business operations and the shares could pass to his son, who is unsuitable to take over. Instead, the other partners or the company may buy his interests. The purchase money would go into George’s estate, but his heirs would not step into his shoes at XYZ.
Divorce: Still working with XYZ company, Sam goes through a difficult divorce. His wife, Ella, wants his shares in the divorce settlement. If they are awarded to her, she may sell them, or attempt to take over Sam’s management roles at XYZ. Depending on the provisions of the buy-sell, XYZ may be able to prevent interference from Ella.
Retirement. After only 10 years in the business, Elaine decides to retire. If she’s on good terms with the other owners, she might just sell them her part of the business. However, what if Elaine decides to sell to someone else? A buy-sell agreement typically should prevent her from selling her shares to anyone other than the company or her partners.
Learn More About Buy-Sell Agreements
Take a few moments to think about worst-case scenarios. What would happen to your company if you or a co-owner left? Does your company have a future if a business partner leaves? If your company does not have a buy-sell agreement in place, call your business lawyer for advice.
Attorney Richard Sierra at the Florida Small Business Center assists clients like you with business and litigation matters. As always, Our Goal Is to Help You Succeed tm. For an appointment, you may call us at 1-866-842-5202 or use the contact form on our website. we represent clients throughout South Florida, including Coral Springs, Coconut Creek, Boca Raton, Delray Beach, Pompano Beach, Sunrise, Fort Lauderdale, Miami, and surrounding communities.