Consider the Following Scenario:
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 accommodate such a demand and a lawsuit commences. Since Frank and David never discussed what would happen to the business upon death or severe disability, the value of each of their interests, 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.
What is 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, termination of employment, or desire to be bought out by a co-business owner. A buy-sell agreement stipulates that if one owner dies or is disabled for an extended period of time, the other owners may have the right to purchase the deceased/disabled person’s share of the business at a predetermined price or according to a specified formula. Additionally, transfers of an owner’s interest to an third parties can be controlled.
Buy-Sell Agreement Benefits
- Allows the surviving shareholders/partners to purchase the deceased owner’s share of the business thus allowing the business to continue.
- Provides each shareholder/partner with an available market for his or her interest in the business in the event of death, disability or other triggering event.
- Guards against a shareholder/partner’s shares from falling into the hands of outsiders by offering a right of first refusal to the remaining owners when a shareholder/partner attempts to offer his interest for sale.
- Enables the parties to mutually establish a method for determining the fair market value of the business and guarantees the parties of the transfer terms and conditions.
- Transfer of shares to a former partner’s spouse can be prevented in the event of death or divorce.
- Avoids costly litigation and infighting over the value of the company when transfers of interest occur.
- Ensures funding so that the surviving family is financially compensated upon the death of a shareholder/partner.
- Money is available to pay to a deceased owner’s estate when the agreement is funded with life insurance.
- Provides a degree of certainty and a smooth transition in the disposition of the small or family business.
- In non-family member situations, a buy-sell agreement can determine share value for estate tax purposes.
Get Started Now
The time to prevent disputes is before they occur. Our experience is that owners anxieties created in dealing with one another, are inversely proportional to the effort they spend addressing business problems in the event that they should happen. Dealing with these contingencies before they manifest themselves is the secret to a harmonious business relationship with other owners. Legal fees as well as sleepless nights will be minimized if you agree to the “What If’s” now. Unfortunately, business owners in today’s hectic business environment often neglect or delay consulting with an attorney regarding the preparation of a Buy-Sell Agreement until it is often too late.