Does your company know how it would handle a death, disability or departure of one of its owners? Whether you are part of a family business or not, buy-sell agreements are important to any company. But what makes it so important? A buy-sell agreement, also known as a business continuity contract, spells out how the assets and business interests would be distributed if an owner leaves the business, becomes disabled or passes away.
Why It Matters
Without a plan in place, an otherwise thriving company can be thrust into turmoil. For example, the remaining owners may become entangled in legal disputes over business assets and management. If the company’s ownership seems doubtful or its future uncertain, its performance will suffer. And that performance doesn’t stop at the leadership team. Employees may feel less confident in and connected to the work they’re doing without the stability of a clear path forward and a unified leadership team.
The possible departure of an owner isn’t the only reason to prepare a buy-sell agreement. Sometimes an owner voluntarily decides to leave a company to pursue another business opportunity or a well-earned retirement. A carefully crafted buy-sell agreement will facilitate the transfer of ownership by assessing a firm’s value and ensuring that all parties are treated fairly.
The Components of a Buy-Sell Agreement
- Triggering Events
The buy-sell agreement should spell out the company’s response to an owner’s departure, including how assets will be transferred, stock ownership controlled and voting rights secured by the remaining owners.
The agreement should describe how the business will be valued should a triggering event occur. It could spell out a specific price for an owner’s interest or specify a formula for determining the company’s value. It might also name a particular firm to conduct the valuation. Click here to learn more about business valuations.
- Lump Sum
The buy-sell agreement might also guarantee a lump sum that’s paid to the owner’s estate if they pass away. Depending on how the business is structured, there may be significant tax benefits to the recipients of a lump sum payout. Talk to your tax professional to see if this applies to you.
- Buyout Method
If one owner leaves the firm, becomes disabled or dies, the buy-sell agreement should include provisions detailing how remaining owners will buy out the interest of that partner. There are many ways to handle this agreement, so be sure to work with an a professional to mediate the discussion.
When to Create Your Buy-Sell Agreement
A buy-sell agreement is instrumental to create at the outset of the company when all the other organizational documents are being crafted. It’s important not to think of a buy-sell agreement as something that you need down the road. Rather, it’s better to proactive in its creation since many of the scenarios a buy-sell agreement addresses are unpredictable. For businesses that have been in existence for a while and still don’t have one, it’s never too late to establish a buy-sell agreement.
Even if you already have a buy-sell agreement in place, you should review and revise it periodically to make sure it reflects your company’s current situation. Contact Cray Kaiser today if you’d like to learn more about preparing or reviewing your buy-sell agreement.