A business buy-sell agreement – sometimes called a buyout or partner-buyout agreement – is vital to any small business that has more than one owner. And that includes family businesses.
Think of it as a kind of prenuptial agreement for business owners. There are too many uncertainties to leave this to chance, including death, divorce, retirement, bankruptcy, misconduct and just plain disinterest in the business that can happen over time.
But while the causes are many, the results are predictable. Without this agreement, an owner’s exit can be rancorous and disruptive, perhaps at a time when the business can least afford the headache. There are loads of what-ifs:
• What if a partner gets divorced and her ex-husband – who gained part ownership in the settlement – causes trouble?
• What if a co-owner demands to be bought out at an unreasonable price?
• What if an owner develops a substance abuse problem, goes bankrupt and your new co-owner is one of his creditors?
There are three basic buyout agreement types:
1) In a “cross-purchase” agreement, a departing owner sells directly to remaining owners. This works best for partnerships, LLCs or S-corporations with no more than a half-dozen or so owners.
2) In “stock redemption” or “entity-purchase” agreements, the business itself buys back the departing owner’s interest and retires the shares. Thus, each remaining owner’s interest becomes more valuable.
3) “Hybrid” agreements combine elements of both.
Once you have an agreement in place, review it regularly. Circumstances will undoubtedly change, and your agreement must change too. Pay special attention to the valuation formula. Have the business appraised every few years.
These resources can help:
• Business Owner’s Toolkit is a helpful website with advice and information on buy-sell agreements that is both succinct and authoritative. Enter “buy-sell agreements” in the site search tool to find what you need. Visit www.toolkit.cch.com.
• Nolo, the self-help legal-solutions publisher, has several articles and a handy buy-sell agreement FAQ you can access for free. Nolo also sells an excellent plain-English guide to writing your own buy-sell agreement. Business Buyout Agreements, fifth edition ($45 print; $35 eBook only), that comes with worksheets and sample agreements on a CD.
• The detailed FAQ on buy-sell agreements at FindLaw.com is also a good resource. •
Dan Kehrer can be reached at editor@bizbest.com.
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