Every co-owned small or mid-sized business needs a buy-sell agreement in place. It doesn’t matter whether your business is structured as a corporation, partnership or limited liability company. Sometimes called a buyout agreement, a buy-sell agreement is a legally binding contract between co-owners of a business in order to control:
- who can buy a departing owner’s share of the business
- what events will trigger a buyout (usually death, retirement, disability or leaving the company)
- what price will be paid for the departing owner’s share
These items should be determined when the business is created or as soon thereafter as possible. Buy-sell agreements have various structures such as a cross-purchase plan or a repurchase (stock-redemption) plan. Sometimes insurance is used to guarantee that there will be money to fund the agreement when the buy-sell event is triggered. A buy-sell agreement should be customized for your specific situation by professionals with experience in this area.
It’s a common mistake to lack a buy-sell agreement, but this oversight leads to easily preventable problems.
Not having a buy-sell agreement in place can create messy situations such as:
- A business owner may wake up one morning to find out that a stranger now owns part of her business.
- An owner getting ready to retire may learn that he can’t make his company buy his stock.
- The majority owner of a company who wants to sell his or her business could have the sale vetoed by minority shareholders.
Don’t put yourself or your business at risk. Our experienced accountants can guide you to create a tailored buy-sell agreement to fit your specific situation.
Contact us to talk about buy-sell agreements or other business planning needs.