People who start a business may be invigorated, excited, looking ahead to a bright future. What they usually don’t think about: death, incapacity, disability, and divorce. However, these dire things all may happen, and it can spell big trouble for the business you so carefully nurtured. Whether you’re starting a new business or managing an existing one, you may need a buy-sell agreement to ensure your company’s future.
A buy-sell agreement, also sometimes known as a buyout agreement, is a legal document that states what will happen if any of those bad things we don’t want to happen actually do happen. This agreement provides guidance when a business owner can’t participate in the business any more, for any reason.
Buy-sells can be negotiated at the same time the company’s formation paperwork is being completed. If the buy-sell issue fell between the cracks, though, buy-sells can be negotiated and signed at any point during a company’s existence – as long as you do it before the triggering event happens. Obviously, you can’t negotiate a buy-sell after someone has died or become incapacitated.
Let’s say The Acme Company consists of five partners: Jon, Robin, Sandy, Arya, and Brandon. They didn’t see any need to sign a buy-sell agreement when their company was formed. As the years go by, though, their lives change and they see a need to protect the company. They put a buy-sell agreement in place, and reap the following benefits:
- When Brandon becomes disabled, The Acme Company buys his shares of the company based on the terms of the agreement. Brandon has money to live on, the other partners still profit from their successful company.
- Robin dies He had a life insurance policy payable to the company, so they are able to pay his surviving family members without hurting the company’s cash flow.
- Arya’s husband files for divorce. The Acme Company is protected from any claims her spouse may have. Because of the buy-sell agreement, the other partners can buy out her share so it’s not affected by her divorce settlement.
- Jon and Sandy disagree about how to run the company and are no longer able to work together. Luckily, their buyout agreement included language about how to handle conflict that affect business performance. Jon buys out Sandy, defeats his competitors, and reigns as President and CEO of the company for years.
Buy-sell agreements benefit business owners in other ways also. If one owner decides to retire, for example, a buy-sell will contain provisions for that owner to be bought out while the other owners retain their shares in the business.
Not Sure if You Need a Buy-Sell Agreement?
The attorneys at the Dillon Law Group, PLC, have the skills and experience to analyze your situation and discuss options that fit your needs. Give us a call at 757-962-4796 to set up an appointment or contact us online by using our convenient Contact Form. We assist clients in Virginia Beach, Newport News, and surrounding communities.