Preparing a Buy-Sell Agreement
The owners of a business understandably usually spend more time focused on running and growing their business instead of thinking about what would happen if one of the owners dies, becomes disabled or otherwise leaves the business. Sometimes this is because considering such matters may feel like you are focusing on negative topics, a bit like preparing a pre-nuptial or post-nuptial agreement. Thinking about and properly planning for such “what if” potentially disruptive events should, however, make them far less disruptive if and when they occur.
The typical way for the owners of a business to address such matters is to create a Buy-Sell Agreement. It’s sometimes called a Shareholders’ Agreement or such terms may be included as part of an Operating Agreement or a Partnership Agreement. A well thought out Buy-Sell Agreement requires going over multiple possible scenarios and carefully considering what the owners would want to occur in each scenario. That includes discussing what events may trigger a buy-out, how the price for a buy-out would be determined and what would be the payment terms. That also involves determining what will be the funding source for any buy-out. In the case of death or disability, it is possible to fund the buy-out with life insurance or disability insurance proceeds. For other triggering events, the company or the other owners will either need to provide the funding or borrow it from a third party.
It pays to think about these matters in advance. You will want your company to be well positioned for continued success. You do not want a disruptive, but foreseeable, event to derail your business or cause harm that could have been avoided by better planning.
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