We all go into business with grand expectations – often times in partnership with others. A key yet often overlooked concern is planning for a smooth transition in the event an owner leaves the business – eventually we all do – for whatever the reason.
A Buy-Sell Agreement is a legal document that spells out how ownership will transition when such an event occurs. Often this transition phase is a critical crossroad for the company with a multitude of challenges. This can become a costly, time consuming, emotional distraction if a buy-sell agreement has not been agreed prior to the triggering event – many times the survival of the business can hinge on how clearly and fairly the buy-sell agreement memorializes succession.
If you have partners a buy-sell agreement is crucial. You will want to have your attorney, accountant and financial advisor involved in the myriad of considerations that should be addressed, at a bare minimum your buy-sell agreement should include:
- How will the business be valued? Valuation is often the most likely aspect that disputes arise. Whatever the methodological, predetermined formula, independent appraisal (models and number of models, high, low, average), whatever the methodology may be it must be clearly defined.
- Who will own the stock? Ownership may be specifically include/exclude specified individuals/family members.
- In the event a partner becomes deceased, how will the stock be purchased from the estate?
- Life Insurance requirements and payment terms.
- Protection that may prevent stock transfers that could endanger your status as an S corporation.
You went into business with your partner – not their spouse/family – you can read between those lines, right? If you don’t have a buy-sell agreement in place you’re at risk.