If you are operating a business that consists of one or more individuals, and you do not have a buy-sell agreement, you may be putting control over your business and its continued operations at stake. Your partners have interests in your common business, and those interests do not necessarily go away just because they pull out of an agreement.
A buy-sell agreement is, in some ways, similar to a will in that it describes what happens to each owner’s interest should they leave the business. Having one in place can prevent your business from becoming beholden to a disgruntled former owner or someone who was never involved with the business in the first place.
What is a buy-sell agreement?
At its core, a buy-sell agreement is essentially a contract between the owners of a business. Upon certain events, such as death or divorce, the affected partner agrees to sell their shares in the business to the remaining owners for a to-be-determined price. The other owners must then purchase the stock back for that agreed-upon price. Given their contractual nature, buy-sell agreements can be enforced through the court system.
3 Scenarios Demonstrating Why It’s Important to Get a Buy-Sell Agreement Now
There are a multitude of situations that are made easier to navigate with your business intact if there is a binding and valid buy-sell agreement set in place beforehand. Some of these situations include the following:
1. An Owner Refuses to Sell Upon Termination of Employment
Business partners are sometimes forced to part ways with one another if their visions for the future of the company become incompatible. In an ideal world, the remaining partner would pay their departing counterpart a fair market price for their ownership interest in the business.
In other words, the remaining partner would own the entirety of the business, and the one who leaves would still have resources with which to restart their life. Alas, things aren’t ever “perfect,” and one partner may look to sabotage the other.
With a binding buy-sell agreement, the disgruntled partner would be contractually obligated to sell their shares for a price determined at the time of the buy-sell agreement’s execution. They would retain no ownership interest in the business, meaning you would be free to continue the business with any remaining partners.
2. An Owner Divorces Their Partner
If a business owner divorces their spouse, there is a chance that their business interest in your operation could be considered marital property and subject to division. If so, the spouse’s new significant other could come into possession of some of the business’s ownership interest, which could make them an unwanted co-owner of what the original owner and their colleagues built.
3. An Owner Develops a Mental Illness or Dies
Lastly, a buy-sell agreement describes the orderly flow of ownership interests in the business upon the death or incapacity of an owner. Without one in place, any ownership interest that a deceased owner had in a business could be distributed to their children, heirs, or guardians, all of whom may not be able to function as an owner or have any interest in the business.
In each of these and other situations, a buy-sell agreement would require an owner who is impacted by a covered event to sell their shares to the company, which would then purchase those shares back and redistribute them to the other owners.
Draft Your Buy-Sell Agreement Immediately
While you can try to create a buy-sell agreement on your own, it is better to employ a skilled Nassau County business law attorney to help you. They will be able to get to know your business’s dynamics, strengths, and weaknesses, which will then enable them to craft a buy-sell agreement that protects your business from the unexpected.
Contact a Nassau County business law attorney with Kohan Law Group about creating your business’s buy-sell agreement today.
The information provided in this blog post is for educational purposes only and is not intended to constitute legal advice. It is essential to consult with a qualified attorney regarding your specific situation and circumstances.