One of the best moves partners, shareholders, and other joint business owners can make is to agree to execute a buy-sell agreement that governs what would happen to a partner’s ownership interest if the partner is incapacitated, dies, goes through a divorce, or is otherwise removed from the business. Buy-sell agreements can be used to show that a business is stable and has future contingency plans, which can be important when the business seeks financing or takes out loans.
In a buy-sell agreement, the business owners agree on how any ownership interests will be sold, how much the interest will be sold for, and under what circumstances the sale will take place. Under the terms of the buy-sell agreement, the remaining business partners or the business itself can buy the departing owner’s interest. If a person inherits the ownership interest, he or she often takes advantage of the agreement because it provides a ready market with a predetermined price to quickly liquidate the ownership interest.
Because the agreement often provides for a sale price, the business has to undergo a valuation. In some cases, the language of the agreement spells out the method of valuation to be used, such as providing a formula or providing that the interest will be sold at market value. There are different methods that can be used in valuing a business, and experts like accountants often have to be consulted on the best method to be used for a particular business. If the agreement is deemed to be ambiguous as to the value of the interest, a court may have to make the final decision as to what price will be used or how the agreement will be enforced.
Shareholder agreements are similar to buy-sell agreements and can contain similar terms on how a departing shareholder’s interest in the business will be handled. Shareholder agreements may deal with a lot more than just how this interest will be handled, and therefore, some shareholder agreements may have clauses that mimic a buy-sell agreement.
Business partners can get insurance policies on each other to ensure that if a purchase pursuant to the buy-sell agreement has to be made after a partner’s death, the other partner would be able to purchase the interest without taking the money from the business.
Contact an Experienced Business Attorney
The best time to negotiate a buy-sell agreement is at the beginning of the business relationship when it is more likely that the partners are negotiating from similar bargaining positions, and not in a hurry to settle the terms or to sell interests.
To discuss how an experienced DuPage County business attorney can assist you in structuring your business and setting up a buy-sell agreement, and handling mergers and acquisitions, contact us at Momkus LLC.