Why Your Company Needs a Buy-Sell Agreement
Starting a business is a lot like getting married. You enter into the arrangement optimistic, hoping and planning for the best. Like a marriage, although you should hope for the best, it’s prudent to plan for alternative outcomes. With a business, it’s even more important–even if your company performs well, there will come a time when you or one of your partners needs to leave. A buy-sell agreement is much like a prenuptial agreement for a business. It lays out certain triggering events and what happens when those events occur. Read on for a discussion of buy-sell agreements and how your company would benefit. Call an experienced Chicago corporate governance and business law firm for advice and assistance with your enterprise.
What Is a Buy-Sell Agreement?
A buy-sell agreement is a plan for the orderly transfer of business ownership interests. The agreement lays out the process should any owner need to transfer their interest, for reasons including:
- Partner dispute
- Standard departure
- Dissolution of the business
Buy-sell agreements are typically used in closely-held corporations, partnerships, and limited liability companies (although many times the buy-sell provisions for partnerships and limited liability companies are contained in the partnership or operating agreement). Every entity with more than one owner but that is still privately owned by a few key individuals can benefit from a buy-sell agreement.
What Does the Buy-Sell Agreement Cover?
The buy-sell agreement includes a plan for an owner’s exit from the business, including details on how the business is split among owners. The agreement can include items such as:
- A right of first refusal for other owners to purchase the ownership interest upon the occurrence of any triggering event
- Limitations on who may purchase or acquire the owner’s interest (e.g., provisions preventing the spouse of an owner from acquiring shares in a divorce, or heirs from inheriting an owner’s shares upon their death)
- Requiring the consent of other owners before transferring ownership interest to any third party or entity
- A process for how business ownership interests will be transferred under any given eventuality–death, divorce, dispute, disability, retirement, etc.
- Details on each partner’s ownership stake
- A method for valuing the business and determining the purchase price of the ownership interest being sold or transferred
- A structure for the payment of the purchase price (ie, lump sum, installment payments)
- Provisions to remove owners under certain circumstances
- Circumstances, if any, when an owner can depart and withdraw from the company
- A process for funding the purchase of a departing owner’s interests
Why You Want a Buy-Sell Agreement
A buy-sell agreement ensures the orderly transition of ownership upon the departure of one or more owners, regardless of the specific event. The agreement can prevent undesirable parties from acquiring ownership interests, such as relatives of an owner that lack experience or a desire to support the enterprise. It can ensure that all current, surviving owners have a say in who becomes an owner in the future, preventing one owner from going rogue and selling their stake to an outside party.
The agreement can also ensure that ownership interests are transferred for a fair value price, preventing disagreements over whether a buyout offer is unfair. The agreement will provide security and confidence to owners, investors, and clients that the unexpected loss of an owner will not interrupt the flow of the business. You have a plan in place to limit the effect of any unfortunate events that may occur, protecting the continuity of the business and ensuring all parties understand their roles.
Seasoned Illinois Entity Formation and Partnership Lawyer Ready to Help You With Your Business Enterprise
For assistance starting a business or with any other business law matter, contact a business law attorney who can offer the individualized guidance you need to make the decisions critical to the success of your enterprise. Call a seasoned and professional corporate governance lawyer at MacDonald, Lee & Senechalle, Ltd. for a consultation, in Hoffman Estates at 847-310-0025, or in Des Plaines at 847-298-5030.