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The Buy-Sell Agreement: No Business Should Be Without One

In the day-to-day activity of making the business work, many owners overlook the importance of the buy-sell agreement.  This document (also referred to as a business continuity agreement) is like a will:  no one thinks about it until it’s too late. However, it may just be the most important written agreement or document you ever create.

If your business has more than one owner, either partners or stockholders, what happens if one or more of them die or “wants out”?   The same thing holds true in a family owned and operated business.  A buy-sell agreement can dictate the transfer of the business ownership under certain events as described within its specifically written language.

The well-drafted buy-sell agreement is designed to prevent the following:

  • The sale of the company because one of the partners or stockholders’ desires to exit the business and no one can agree on the price or the terms.

  • The necessity to sell or dissolve the business due to lack of a written agreement determining ownership/management of the business in case of a partner’s, stockholder’s or family member’s death.  (Or, what might prove even worse than a precipitous sale, an heir might decide that he or she is going to get involved in the operation of the business.)

  • Lack of agreement on who should take control when an active partner, stockholder or family member becomes disabled and can no longer run the business.

  • A serious dispute on any key issue among the partners, active family members or stockholders that cannot be resolved.

  • The operation of the business comes into question following a legally complicated divorce (or other legal entanglements) involving one of the partners, family members, or stockholders.

The buy-sell agreement can help prevent these situations, as well as many other problems that can befall a business enterprise. In a small business, one of the areas frequently overlooked is the buy-out provision, in the event, one of the active partners decides to exit.  The buy-sell agreement normally, and properly, provides for the partner, family member or stockholder to have the first right of refusal in this case.  But at what price?  If two partners are in disagreement over how to run the business, they will never come to an agreement about its value.  A method or formula for valuing the business should be included in the buy-sell agreement; otherwise, the first right of refusal can be no right at all.

In larger businesses, especially those that are incorporated, it is important that the buy-sell agreement specifies how the stock of the business is to be valued.  The agreement would also specify whether the company or its shareholders must purchase the stock, or if it can be sold to an outsider.  In many cases, life insurance coverage is used to purchase the interest or stock in the business, in the event that one of the partners or majority stockholders dies.

You can see that the buy-sell agreement if executed properly, can solve problems surrounding retirement, disability, termination, divorce, bankruptcy, death, and business disputes.  Given all the key benefits of such an agreement, why doesn’t every business have one?  Most business owners are too busy trying to get the work done and the bills paid.  Creating such a document also means that the owners have to stand back from the business and decide what should happen under a variety of serious situations. The process is time-consuming, and it is also expensive.

Buy-sell agreements, as well as all of the important documents pertaining to the sale of a business, should be handled by an attorney experienced in such matters. It may seem expensive in the short run, but the careful preparation of an agreement that can affect the rights of the buyer or seller will be a bargain in the long term.

 

– Wayne A. Simpson CPA, M&AMI is a Managing Partner at Utah Business Consultants and a Merger & Acquisition Master Intermediary with the M&A Source. Utah Business Consultants is a full-service Business Brokerage and Valuation firm.