Frank and David decide to form an auto repair shop. At the outset, they structure their business so that each has a 50% interest in the company. Several years later, Frank becomes seriously ill and fails to survive. Having no experience in the auto repair business, Frank's family requests a cash settlement to compensate them for their 50% of the business and to cover Frank's debts. david is unable to accomodate such a demand and a lawsuit commences. Since Frank and David never discussed what would happen to the business upon death or severee disability, the value of each of their intersts, or the method of paying the estate of the deceased shareholder, the business is forced to be sold in order to pay Frank's debts and legal fees.
Such a scenario could have been avoided through the use of a buy-sell agreement. A buy-sell agreement is a written agreement between joint business owners that addresses a wide range of issues that could result upon the death, disability, retirement, or a desire to be bought out by a co-business owner. Such issues include who will remain in control after a change of ownership, and methods for valuing the business and each owner's share thereof. Such agreements are invaluable in avoiding drawn out legal disputes over ownership of the business and for assuring the continuity of a business on the occurrence of one of the above-mentioned events. Buy-sell agreements may be entered into either between partners in a partnership or between shareholders in a corporation.
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