Are Buy and Sell Agreements Important?
You, along with a group of desired partners, finally start your dream business. As partners you are all excited for the formation of the business and the journey that lie ahead. Unfortunately, as in life, somethings may never go according to plan. As your business continues to flourish one partner decides that the venture is just not for him and wants to sell his business interests.
Why Buy and Sell Agreements Matter
Without a proper buy and sell agreement, the departing partner may sell his business interests under his own price or even to anyone of his choosing, even if it goes against the wishes of other business partners. This dispute may even lead to litigation amongst partners. In addition, without a buy and sell agreement in place the business may be subject to significant tax burden and other financial issues. Fortunately, a valid buy and sell agreement may alleviate partners from such uncertainties and helps avoid costly litigation. A buy and sell agreement is a binding agreement that reallocates a departing partner’s business interests according to the terms and conditions agreed upon.
Moreover, in a buy and sell agreement, the owner of the business interest that is being considered for reallocation is either deceased, disabled, retired, or expresses in selling his or her interests. A buy and sell agreement can require that the departing partner’s business interests be sold to the company or to the remaining members of the business according to a predetermined formula. Thus, a buy and sell agreement is important because it contains terms on how to price the departing partner’s business interests. This price can be valued by using a specific formula—as agreed upon—to value the business. It may also be important for business owners to input a business valuation clause into the agreement, which outlines that an expert may be used to access appropriate means to value the business.
How Buy and Sell Agreements Protect Your Business
Other than setting a determined price, buy and sell agreements can also determine who may or may not be a buyer of the departing partner’s business interests. This is ideal for circumstances where owners are close friends or family members and want to be able to choose certain members to be able to buy into the business. Thus, setting such ground rules will prevent having a departing partner’s fiduciary agents, such as lenders, or other unwanted buyers buy into the business.
As a business owner, it is essential to be in much of control of the business as possible and be well prepared for the risks of a departing partner. Having such control on who buys in or buys out of the business is key to the success and survival of a business. In forming your dream business having a buy and sell agreement will better prepare you for the risks that may come and avoid unnecessary litigation.
*This blog is not intended to give legal advice, if you are interested in more information and or consultation please contact Slate Law.