There are many unanticipated changes that can cause your otherwise successful business to suddenly change direction. Being prepared with a buy-sell agreement can help you weather through events like a divorce, disability, irreconcilable dispute, or an unexpected death.
What is a buy-sell agreement?
A buy-sell agreement is a legally binding agreement between owners of a business that controls what happens when co-owner leaves the business. Think of it as an estate plan for your business.
What should be considered and included in a buy-sell agreement?
Take a look at some of the following items to help you identify goals, and commitments of the business owners and the business itself. Discussing these with your other business owners and your business attorney can help you withstand transitions of the owners and encourage the continued success of your business.
Are there any on-owners on the management team?
Do all owners participate in the management of the business?
Are there procedures in place to manage through transitions?
Have key employees been identified other than the owners?
Do any key employees have stock options, profit interests, or any other instrument that’s convertible to equity?
Is it possible that there could be a deadlock such as a 50/50 ownership? and is there a mechanism to resolve a deadlock?
What would your business do if a triggering event occurred?
- Termination of employment
- Sale to a non-owner
- Expulsion of an owner
If a triggering event happens, what buyout options do the remaining owner(s) have? and how will the value of the business be determined? Formula, appraisal or a pre-determined price?
How will payment be made for the departing owner’s interest?
Will life insurance be used to fund the buyout obligation? Who will own the life insurance? Who will be the beneficiaries?
What are the tax consequence of the buyout? Will there be gift tax or estate tax consequences? Capital gains or ordinary income?
Is there a professional licensing concern to ensure the business passes to a qualified owner?
Are there restrictions to the transfer of ownership?
Do the owners want to restrict issuing new equity?
Do the owners want to protect minority owners if the majority owner decides to sell to a third party?
- The type of business you have
- Whether or not there is already a buy-sell agreement in place
- The persons who manage the business
- How the owners address employment issues such as:
- Non-competition agreements
- Non-disclosure agreements
- Non-solicitation agreements
- Protection of intellectual property and intangible assets
How to Prepare
Spend some time going through this list. If you’re unsure about the answers to these questions or how it could impact your business, give us a call. We will review your business situation, help you determine if you already have a buy-sell agreement in place or if you need to implement one to comprehensively protect you and your business from life’s unanticipated changes.