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Why you should have a buy-sell agreement for your business

Business continuation is a question I ask business owners about when meeting with them. Without a plan in place, the business and owners can lose control if something unexpected happens to one of the owners.

Recently, I was in a business talking with an owner about another issue and our conversation transitioned over to buy-sell agreement planning. These owners had talked about getting a buy-sell agreement in the past years, but it was something that they put off because nothing was likely to happen. Well, as we all know, things do happen. An owner became ill and eventually passed away leaving the business by default to the heirs.

Once partners who started and built the business together and knew everything about how thing ran and why, now had new partners. These new partners questioned and had to understand why things ran the way they did. The new partner had to understand the vendor, employee and buyer relationships that both original owners had developed over the years. And worse yet, the new partner was not participating in the running of the business, yet felt they should fully share in the profits of the business that was built by their loved one.

Why a buy-sell agreement could help

If a simple buy-sell agreement was put in place, transition of ownership would have been as clear as the agreement terms. But without this buy-sell agreement, the surviving partner needs to try and negotiate the terms of sale from the heirs, if they are even willing to sell their interest. Or the sale of the business could be forced by the heirs in many cases, if they want to get the equity out of the business. They could also sell their share to a competitor or any other party whom they wish. As you can see, without a buy-sell agreement, the surviving partners can be at the mercy of the heirs.

With a buy-sell agreement in place, the valuation of the business will likely be set and terms of who can/will purchase the outstanding shares or ownership rights will be spelled out in the agreement contractually. If the plan has been funded properly with Insurance or another funding source, then this transition will be a smooth one.

Will you need a buy-sell agreement

If you are in business long enough, you will want/need to transition your business interest to another. You can prevent a situation from occurring where you, your partners and your business are out of control. Look at getting a buy-sell agreement or succession plan that spells out your wishes and executes them accordingly. Even if that means the liquidation of the business, it will be on the terms that you want, not that of a court or other party.

A well drafted buy-sell agreement will address transfer of ownership of your business in the case of death, in the case of disability or if an owner wants to leave the business and sell their ownership position. It is always better to have a plan in place that spells out how ownership will be transferred and who has the first right of refusal to purchase those ownership rights. It is also wise to do this when owners are on good working terms.

How to get started on a buy-sell agreement

Please consult with a qualified attorney who has experience in business buy-sell agreements or business continuation plans. They will be a resource of information for you and can help you draw up a plan that fits your business and wishes. If you have questions about funding your buy-sell agreement or business continuation plan please let us know. Life Insurance and Disability Insurance products can often provide cost effective options to fund and provide protection to all parties to a buy-sell agreement.