A big part of running a business is looking ahead. What trends will affect your company in the coming years? Are you considering any expansions? Forecasting the future is not easy, so it helps to have plans in place. For example, companies owned by more than one person may run smoothly – until something happens to one of the owners. If there’s no plan, the business may suffer during a transition period. That’s where buy-sell agreements can make a big difference.
What are buy-sell agreements?
It’s a legally-binding contract signed by the owners of a business. The document’s provisions stipulate how one partner’s share of the company will be handled if the partner leaves the business for any reason.
Buy-sells can be negotiated and executed at any time. However, it’s best to have this important document in place when forming your business.
Is there more than one type of agreement?
Yes, there are two common buy-sell agreements:
- Entity-Purchase Agreement. When this contract is in place, the business itself buys the departing person’s interest in the company. This document may also be called a redemption agreement.
- Cross-Purchase Agreement. Instead of the company, the remaining business owners buy the available business interest.
Sometimes, business partners will choose one type of buy-sell over another. It’s also possible to customize an agreement by mixing elements of both entity-purchase and cross-purchase agreements.
How do buy-sell agreements work?
A business partner might leave a business for any reason, including:
- Divorce,
- Retirement, or
- Death.
As soon as the triggering incident is known, the remaining partners should review the terms of the buy-sell agreement. The company’s attorney should also review the agreement. What happens next depends on the type of agreement in place.
Often, a company or its individual members buy insurance policies that will provide the money needed to buy out a deceased partner’s business interest.
Does Your Business Need a Buy-Sell Agreement?
Buy-sell agreements can protect a business owners from dealing with the uncertainty of the future of the business in the event of an untimely exit by a partner.
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.