A Buy-Sell Agreement is one of the most important documents that any business start-up with two or more owners can have.
Buy-Sell Agreements are not focused on the current buying and selling of companies, but rather on the potential future buying and/or selling of individual owners' interests in the business when certain events occur.
This agreement helps the owners turn their business interests into cash and to control who their business partners are. Indeed, the underlying principle behind Buy-Sell Agreements is that the owners of the business should be able to choose their partners.
A Buy-Sell Agreement maps out in advance, for example, what happens when one owner dies. Is the business required to buy out the deceased owner's interest, thereby providing some financial security to the deceased owner's family? How is the purchase price to be calculated, and when is the money to be paid?
What happens if one of the owners gets a divorce, or there is a personal bankruptcy and an outsider spouse or other person gets an ownership interest in the business? Without a properly drafted Buy-Sell Agreement, the owners may find that they are now dealing with a "partner" that they don't want.
A Buy-Sell Agreement can also provide for what happens if a working owner becomes disabled or wants to retire. It can further spell out what happens if one of the owners fails to make required distributions of money or property. In the latter case, perhaps the owner owners have the right to buy out the defaulting owner's interest at less than fair market value.
Having a plan in place at the beginning when all of the owners are healthy and getting along can save significant cash and headaches later. And, a Buy-Sell Agreement can better protect the business itself as well as the owners.
Odds are high that when owners delay forming a Buy-Sell Agreement, one is never formed.
The above examples are just some of the scenarios than can be addressed in a Buy-Sell Agreement. When you build a new house, you don’t like to think that it could be harmed by fire or storms. Yet, you buy homeowner’s insurance as soon as you build the house. Much like you wouldn’t build a new house without also buying homeowner’s insurance, it is not wise to start a multi-owner company without also signing a Buy-Sell Agreement. Expect the unexpected.
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