Performance of some business contracts starts as soon as you sign them. Others, like the buy-sell agreement, are triggered by future events. If you are wondering, “What is a buy-sell agreement?” then read on to learn more about this vital business document.
Buy-Sell Basics
The buy-sell agreement is a binding contract. Business owners prepare this document, also called a buyout agreement, to be protected if one of the owners leaves the business. Generally, the agreement covers situations where an owner:
- Goes through a divorce,
- Decides to leave
- Declares bankruptcy,
- Becomes incapacitated, or
It’s best to prepare one during business formation since there’s no way to foretell the future. However, owners can sign a buy-sell at any point during a company’s lifetime.
Who Needs a Buy-Sell Agreement?
Any company owned by more than one person should have a buy-sell agreement in place. Think about each owner’s contributions to company operations. What would you do if that person left? Buy-sell agreements provide the guidance needed to get your company through what could be a difficult time.
For example, let’s say one of the business owners passes away. His interest in the company passes through his estate to his wife and son. You might get lucky, and they might seamlessly become integral parts of the business. On the other hand, it could be an unmitigated disaster as two people who know virtually nothing about the company move into the deceased owner’s spot.
How It Works
Co-owners negotiate the terms of the agreement. Your corporate counsel or business lawyer draw up the buy-sell agreement for everyone’s signatures, usually in one of two forms:
- Cross-purchase agreement, where the partners buy the departing owner’s shares; and
- Redemption agreement, where the company itself purchases the business interest.
It’s also possible to use a hybrid method, where co-owners buy a percentage of the available interest and the company purchases the remainder.
But your business will need money to finalize the transactions.
One method to ensure money is available when needed involves the business partners buying life insurance on each other. When one partner dies, remaining orders can use the insurance proceeds to acquire the deceased partner’s interest. Other ways to fund the buy-sell agreement include borrowing the money, agreeing to an installment plan, or holding funds in an account
Buy-sell agreements usually provide guidance on determining the value of the business if the agreement is triggered.
Does Your Company Have a Buy-Sell Agreement?
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™. For an appointment, you may call us at 1-866-842-5202 or use the contact form on our website. We represent clients throughout the State of Florida, including Coral Springs, Coconut Creek, Boca Raton, Delray Beach, Pompano Beach, Sunrise, Fort Lauderdale, Miami, West Palm Beach, Jupiter, Deerfield Beach, Stuart, Port St. Lucie, Orlando, Naples, Fort Myers, Sarasota, Tampa, and surrounding communities.