Buy-sell agreements are a critical component of any partnership agreement. Designed to weather the kinds of life changes that can disrupt a business, these agreements can provide mutual financial protection.
To get the most benefit out of a buy-sell agreement with your partners, here are the primary things that need to be addressed:
1. Owner goals
What are your future goals for your business? Do you eventually see it going on the open market or do you want to keep it in the family? Knowing how you envision the future allows you to more easily craft a cohesive buy-sell agreement.
2. Buy-out triggers
You need to determine what sort of events will trigger a buy-sell agreement. Typically, these include things like a partner’s death, divorce and retirement. However, you should also consider things like permanent disability, being incapacitated for a lengthy period and the inability to meet financial obligations.
If you intend to pass your business on to your heirs, you need to make certain that your estate planning attorney and your business attorney are in communication. Agreements should reflect all your goals for the future and complement — not contradict — each other.
4. Non-compete clauses
You want a clause in place that will prevent shareholders from working with competitors or starting another business in direct competition to the one you have now. Make sure that your buy-sell agreement has a contingency plan that requires shareholders who want to do so to forfeit their stock in your existing company.
5. Buyout terms
It’s important to address buyout terms like interest rates, security guarantees, buyout periods and downpayments. You also need to address what happens if there is a cash flow problem. You don’t want to put your business in a dangerous financial position with unfavorable terms.
A good buy-sell agreement benefits everyone in a company, and it is the best way to avoid litigation that’s harmful to your business during a time of flux.