Having a business partner is great — someone to share your vision, the workload, the lunch bill.
But what happens to your business if something happens to your partner? If you haven’t asked this question yet, you better read on.
Just like every person should have a will, every business should have a buy-sell agreement that details what happens if one co-owner dies or leaves the business for some other reason.
Without one, you could be left without a partner or, worse, with an unqualified partner or, worse still, without a business at all.
When a business owner dies or cannot continue to assist the business, the business suffers from the loss of key personnel and all the knowledge, talent and customer and vendor relationships that may be associated with that person.
That loss is compounded if the business is forced to work a new partner — possibly the deceased partner’s spouse or child — who contributes little to the business but expects to draw a salary all the same. A buy-sell agreement ensures that one’s business ownership equals one’s contribution.
A buy–sell agreement governs what triggers a buyout, who can buy the resulting share of the business and what price will be paid for that share.
A buyout can be triggered by death, disability, retirement or a dispute and may be limited to shareholders or include outsiders.
Even single-owner businesses can benefit from a buy-sell. The buyer could be a key employee, competitor, supplier or even a customer.
Buy-sell agreements come in two types: cross-purchase or redemption. In a cross-purchase, the remaining shareholder(s) buy the departing share. In a redemption, the business itself buys the shares.
The price might be fixed (although this is generally discouraged), determined by appraisal or formula. The price might be paid in a lump sum or installments and might vary depending on the triggering event. The buyout generally is funded with life insurance on the owners.
An experienced estate attorney can help you choose the right type of buy-sell agreement and draft it. The agreement may call for a mandatory sale, a put or a first right of refusal. A mandatory sale requires that the departing owner sell their interest only to the remaining shareholders.
A put states that if the departing owner decides not to offer their interest to an outside party, the remaining shareholders must buy their share. And a first right of refusal requires the departing owner to offer their share first to the remaining shareholders before being able to sell to an outsider.
Typically, buy-sell agreements consider the ramifications of the death of a shareholder. But you should consider including the other seven deadly Ds in you agreement as well: disability, departure (retirement), divorce, deadlock, disagreement, default and determination of value.
Some of these considerations may seem unfathomable now. But partners will have a better chance of coming up with fair solutions for all parties if they decide how to proceed before a highly emotional event such as death, disability, divorce or a disagreement.
Once you have a buy-sell agreement, don’t just file it away and forget it. Consult with a qualified estate-planning attorney every couple of years to make sure that the terms of the agreement still make sense for where the business is at that time. Stipulations such as valuation of the business, funding of the agreement and the terms of the agreement may need to be altered as the business grows.
Smith and Barid are co-founders of Savannah-based Smith Barid LLC, which specializes in estate planning and special-needs planning. They are accredited VA attorneys with extensive experience arbitrating denied pension claims. They can be reached at 912-352-3999 or email@example.com or firstname.lastname@example.org.