Key Elements in a Buy-Sell Agreement and Their Importance
Those individuals successful in business know that there is an advantage to forward-thinking. Being prepared for the future, unexpected challenges or a changing business climate all need to be in the forefront of a business owner’s mind. Preparation is a key element of any business. There are many ways in which a business owner can be prepared, such as through the use of a buy-sell agreement.
A buy-sell agreement is a “legally binding contract that stipulates how a partner’s share of a business may be reassigned if that partner dies or otherwise leaves the business.” It is a contract among co-owners of a business that outlines a plan of action if a partner leaves the business. Many of the terms and conditions of a buy-sell agreement will be heavily dependent on the type of business entity involved, the number of business owners, nature of the business, and other considerations. The specifics of every buy-sell agreement will be different between each individual business, but there are key elements that anyone involved with a buy-sell agreement will want to consider:
- Triggering Events: It is essential to have language in the agreement that outlines when the agreement is triggered and the conditions contained within it can be enforced. Is this agreement only applicable to the death of an owner? Can events like termination of employment, losing required professional licenses, or even bankruptcy trigger the agreement?
- Rights and Obligations: There is a difference in something being considered a right versus an obligation. If a triggering event happens, are conditions in the agreement mandatory? Or do the parties to the agreement have the option to enforce the terms?
- Tax Implications: Buying and selling a business can have serious tax implications. The implications for all parties to the agreement need to be considered before signing.
- Valuation of the Business: In many agreements, owners are given the option to buy the leaving owner’s share of the business. This comes for the need to valuing the business. Business owners do not know what the value of their business will definitely be in the future, but the agreement can set forth the manner in which the business will be valued when it needs to be.
- Funding and Buy-Out Term: The buy-sell agreement needs to contain terms that outline the timeline of buying the business. It needs to be done efficiently so that the goals of both the buyer and the seller are considered. The timing of the buyout needs to be considered in the funding. You never want to leave your business in a vulnerable cash position, so timing the buyout with the funding required is essential.
The business law attorneys at the Law Office of Kris Mukherji know the importance of being prepared and the importance a buy-sell agreement can have on your business. We want your business to be set up for success, and part of that success is having properly drafted language in contracts. Contact us today for a consultation.