The Business Prenup – a Buy-Sell Agreement

If you own or are considering starting a business with a partner or multiple partners, you need to consider what will happen to the business if you or one of your partners leaves the business. Don’t wait until an event of departure occurs – contact a business formation attorney to structure your business in advance to plan for the future.

What Is a Buy-Sell Agreement?

A buy-sell agreement is a contract between the owners of a business that dictates how ownership interests of one or more owners can be transferred to the company or the remaining owners in the event of specific occurrences. A buy-sell agreement (sometimes called a “buyout agreement”) requires an owner to sell or offer to sell their interest in the business to either the business or the remaining owners under certain circumstances and subject to certain terms.

Why Buy-Sell Agreements Are Important

Buy-sell agreements are typically put in place to ensure an orderly transfer of business interests in the following situations:

• An owner dies
• An owner becomes incapacitated
• An owner retires or otherwise leaves the business
• An owner divorces and is not awarded all of his or her interest in the company in the divorce

Without a buy-sell agreement, the stability of the business could be put at risk if one of these situations were to occur.  For example, upon the death of an owner, the owner’s spouse may inherit a controlling interest in the business, or the spouse may choose to sell their shares to someone without the other owners’ approval.  A buy-sell agreement could require the spouse to sell the inherited interest to the remaining owners at a set price or based on a formula or an appraisal.

Other Features of Buy-Sell Agreements

Buy-sell agreements can also include other elements that can be very useful when facing an unexpected change of ownership:

• An established method for determining the value of the departing owner’s interest
• Rights of first refusal, allowing the business or remaining owners to decide whether they want to purchase the departing owner’s interest
• Voting requirements and thresholds for purchasing the departing owner’s interest
• Methods for resolving disputes
• Identifying funding sources for purchasing the departing owner’s interest, such as an insurance policy

A carefully drafted buy-sell agreement allows the business owners to agree in advance on how the business will deal with the sudden departure of an owner, whether it be death, disability, or some other reason. A business formation attorney can work with you and your partners to draft an agreement that makes sense for your business.

Common Types of Buy-Sell Agreements

Generally speaking, there are two basic types of buy-sell agreements:

• Cross-purchase agreements, where the remaining owners purchase the interests of the departing business owner
• Redemption agreements or entity-purchase agreements, where the business entity purchases the interest of the departing business owner

This may seem like an insignificant difference, but the type of buy-sell agreement can significantly affect the ownership interests of the remaining owners. Some businesses use “wait-and-see” agreements that allow the remaining owners to choose whether the owners or the business will buy out the departing owner based on what is in the best interest of the business.

Contact J Nichols Law, PLLC, and Let’s Discuss Your Business’s Future

Building a business takes a lot of work. A buy-sell agreement can help ensure that your business will continue to grow for years to come. Call us today at 409-257-7878 or send us an email to schedule a consultation.