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).