Sometimes referred to as a “Business Prenup” a Buy-Sell agreement defines what happens to the ownership of your business if there should be a triggering event involving you or a business partner. A triggering event can be death, disability, divorce or bankruptcy. A triggering event may also occur if one partner decides its time to retire or just wants out of the business!
You may not necessarily want your partner’s spouse or children as business partners no matter how nice they may be. And you certainly don’t want one of your competitors to end up owning a piece of your company. So how do you prevent these things from happening?
A Buy-Sell establishes what will happen in these instances, who interests can be transferred to, and how they will be valued. The agreement will commonly be either a cross-purchase type, where one partner agrees to buy out the other, or a redemption agreement whereby the company buys out the departing partner’s interest. Many times Buy-Sells include a provision to fund the agreement by buying life insurance so that there is adequate cash available to pay the estate of the partner who dies.
A Buy-Sell agreement makes sense for any type of business, whether corporations, LLC’s or partnerships. Even most small businesses should have such an agreement. The cost of drafting a Buy-Sell is small in comparison to the potential problems, disputes and confusion that could ensue if there isn’t one in place when a triggering event occurs.
You’ll need a lawyer who is experienced in such matters to help draft an agreement, but Buy-Sells don’t have to be overly complicated or expensive. Having a general understanding of what you want the agreement to provide for BEFORE you visit with the attorney will help to keep the cost down, so this should be discussed with your business partner(s) ahead of time.
Don Karlewicz, CPA, CGMA
Don Karlewicz is the managing partner of GKG CPAs, a tax, accounting and business advisory firm.