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How to protect your business with a buy-sell agreement

If you are not the sole owner of your business, then there are events that could threaten your future. Many of life's twists and turns could leave you without one of your partners for any number of reasons, a buy-sell agreement is a way to make sure you and your company are protected from the consequences of fallout.

What is a buy-sell agreement?

Also called buyout agreements, these plans are very similar to premarital agreements. In general, they set the conditions and arrangements that will be used for one partner or shareholder to buy out another under certain conditions. These conditions can be as diverse as the business itself, but the most common reasons are tied to a party leaving the business through retirement or death. A general rule is that any business that has more than one owner should include a buyout agreement. On the other end of the spectrum, publicly owned companies are subject to different regulations and would not use this type of contract. Therefore, if you understand what the agreement is, the next step is to understand what it should include and how it works.

Things to consider in a buy-sell agreement

As a business grows in value, the terms of the agreement become more important. For that reason, it is usually best to make the agreement as soon as possible. When you put yours together, these are the major points you will need to include:

  • Triggers. This is the core of the document and lays out what events will trigger a buyout. The most common triggers are disability, divorce, debt, conflict, retirement and death. Keep in mind that these are not universally applicable. A property owner may be able to continue to serve his or her role with a disability, for example.
  • Buyer. This seems obvious, but you need to clearly document who the intended buyer is in each event. This becomes more challenging as the number of invested parties increases.
  • Terms. This will include the price of the buyout and the other important conditional issues. Is the company to remain intact and in production? How will employees be protected? The key to the terms is to find the right balance between protecting the company without prohibiting the purchase.
  • Funding. In most cases, a partner or partial owner is making the purchase, so it is important to make sure the funds will exist to make everything possible in the first place.

Those are the major points, but you want to be as thorough as you can. Tax issues, how to appraise the business and additional details should not escape your notice. The guidance of an attorney experienced in business purchase plans is a good resource to make a fair and balanced agreement. Contact Bernstein & Feldman, P.A. at 410-216-4006 to discuss the risks and consequences of a buy-sell agreement.

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