While some business are owned and operated by a single individual, many businesses are a part of something bigger. Co-owners, partners or shareholders all have a stake in the company: so what happens when one of them is suddenly gone or on their way out? Many businesses that grow organically or through mergers suddenly find themselves in a situation where it’s not spelled out what the process is for when one of the business owners no longer wants or is able to continue their ownership. A standard solution for stopping this issue before it occurs is the Buy-Sell Agreement.
Understanding the Buy-Sell Agreement
A buy-sell agreement is a legally binding agreement between co-owners of a business, and deals with the situation if one owner leaves – either willingly or is forced to leave the business. In many ways it is similar to a premarital agreement, which lays out what happens if both partners split ways. It is also sometimes known as a “business will”, as it deals with the succession of the business during a crisis such as the death of one of the owners.
A buy-sell agreement governs what happens when one of the businesses owners will no longer be a part of the company, but why is this important? The short answer is money: a lot of money is sunk into the assets of a company, and can’t easily be divested. When an owner wants to leave (or his death means his family must be compensated for his part of the business) how does that affect the capital and assets of the business? Let’s look at some of the common “triggering events” that can bring about these problems, and how they are resolved with a buy-sell agreement.
5 Triggering Events for Business Owners
There are five events that are the most common for business owners which might require their ownership to be transferred. These include for both accident and planned departures.
1. Leaving the Business
An owner wishes to leave the leave the company- perhaps they are retiring. Perhaps they are moving on to another job. This agreement sets protocol for how they leave the company and their value and options for their share of the company.
One of the owners might be unable to continue working at the job due to a disability. This helps define what disabilities are covered under the triggering events.
The buy-sell agreement can dictate what happens to company shares when an owner passes, as well as the value for the purpose of estate taxes. Owners can make sure their ownership passes to whom they want.
Divorces are a messy business at the best of times, and when a business is involved they can get much worse. You can stipulate what occurs with your shares in the event of a divorce.
When an owner has to declare personal bankruptcy or insolvency, the buy-sell agreement can help avoid part of the company being sold off to cover debt.
“Upon the occurrence of one of the above mentioned Triggering Events, owners are guaranteed their interest in the business will be purchased,” explains Attorney at Law John Alexandrov. “A buy-sell agreement can also provide for optional buy-outs when a member wants to retire, wants to sell their ownership interest to a third party, declares bankruptcy, or has a court order affecting his or her ownership interest in the company.”
Make sure your business is prepared for this very real possibility by having a buy-sell agreement in place. When it comes to bringing on new owners, especially when buying or selling a business, or through a merger, a business broker is essential to working with all parties and with attorneys to make sure buy-sell agreements cover all parties fairly. Contact George & Company for more information.