HomeInvestmentsWhat is a Buy-Sell Agreement and Why Should Business Owners Care?

What is a Buy-Sell Agreement and Why Should Business Owners Care?

I always find it fascinating how many business owners do not even consider a buy-sell agreement when operating their business.  What’s worse, in my opinion, is how many professional advisors (whether that is a financial advisor, accountant or attorney) completely fail to bring up the subject of a buy-sell agreements to their business owner clients.

What is a Buy-Sell Agreement?

A buy-sell agreement is a written contract between two individuals (more often than not it is two business owners) that provide for a certain outcome as it relates to a business or businesses if a condition precedent happens.  The easiest example is death.

Let’s say you and I own a business together, and I die, what happens to that business?  Assuming I have a will that leaves everything to The Wife (and I do) then, surprise, you now have a new business partner, My Wife!  Possibly worse for some people, you die.  Now I, the surviving business owner, am negotiating with your spouse to buy him or her out…think I may try to take advantage of the fire sale?

Most practitioners stop at death but there are so many more things that a buy-sell can cover.

Beyond Death What Other Situations Can a Buy-Sell Provide For?

The big one is death, but there are other situations that a buy-sell can provide for:

  • Disability – What if one one owner becomes disabled? Is the non-disabled owner just expected to run the business and pay the salary of the disabled owner forever? If not for how long? The non-working owner is going to be worried about current income while the working owner is going to be worried about growing the business.
  • Divorce – What if your co-owner is in the middle of a divorce and the shares of the business become part of equitable distribution or whatever system your state may have.
  • Departure – What if one owner wants out? Wouldn’t you want to determine terms when no one is in a weakened position
  • Deadlock – what if the owners can’t agree on a topic?
  • Default – What if one of the partners goes through a bankruptcy proceeding? Wouldn’t you want to determine how and when to buy his or her shares?

There are a number of other situations that may be specific to a particular industry, such the loss of a license when a profession calls for it (i.e.  if you can no longer practice law your co-owners are likely going to have to buy out your interests).




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