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Need help with a Buy-Sell Agreement?
What is a Buy-Sell Agreement?
Buy-sell agreements, also called buyout agreements and shareholder agreements, are legally binding documents between two business partners that govern how business interests are treated if one partner leaves unexpectedly. A buy-sell for small business owners is a practical approach for safeguarding a company, customers, employees, and other stakeholders.
Events that generally trigger a buy-sell agreement include:
- Event 1. Employment termination
- Event 2. Employment resignation
- Event 3. Retirement
- Event 4. Permanent disability
- Event 5. Divorce
- Event 6. Bankruptcy
- Event 7. Passes away
Here is an article about buy-sell agreements. If you need specific legal advice, always speak with corporate lawyers licensed in your state for personalized information.
How Buy-Sell Agreements Work
Buy-sell agreements are in place to protect a company’s longevity. If a vital member of the company leaves, there needs to be a process that tells shareholders and remaining partners how to proceed. Since buy-sell agreements aren’t limited to a partner’s death, ensure you protect your company from external forces by understanding their work.
Here is how buy-sell agreements work:
- Step 1. Determine which events invoke a triggered buyout
- Step 2. Establish who has rights and purchase obligations
- Step 3. Identify the names and address of the purchasers
- Step 4. Set a purchase price or valuation with applicable discounts
- Step 5. Establish payment terms as well as their intervals
- Step 6. Decide on the consequences of not using purchase rights
- Step 7. Agree upon a valuation methodology
- Step 8. Set an assignment of shares and how they’ll be distributed
The buy-sell evaluation process can be complicated. Here is a web page that explains buy-sell agreements.
Types of Buy-Sell Agreements
Selling your business shares upon a triggering event is a significant legal issue to consider when you own a business. Types of buy-sell agreements include cross-purchase agreements, redemption agreements, hybrid buy-sell agreements, company purchase agreements, and asset purchase agreements .
Consider your options carefully when engaging in a buy-sell agreement and speak with corporate lawyers to learn about your legal rights.
Cross-purchase agreements permit company shareholders to purchase the stocks of a partner when a triggering event occurs. It often hinges upon a life insurance policy so that something of value can be exchanged. These types of buy-sell agreements are often used in business succession planning.
Redemption agreements require the company to redeem the deceased or disabled partner. They return the stock ownership to the corporation as payment under the buy-sell agreement. Payments are funded through the disability or life insurance of the deceased or disabled partner.
Hybrid Buy-Sell Agreements
Hybrid buy-sell agreements, also called wait-and-see agreements, usually involve an option for shareholders and corporations to acquire shares after a triggering event. They allow the company to postpone selecting a cross-purchase agreement and a stock redemption until later. This option provides flexibility to the remaining company owners.
Company Purchase Agreements
Company purchase agreements are essential for transferring the ownership of a business upon a trigger event, such as death or disability. They generally contain the terms and conditions of the sale, including obligations, warranties, and liabilities.
Asset Purchase Agreements
Asset purchase agreements may fall under a buy-sell agreement when business transactions include the transfer of assets, such as property, real estate, and equipment.
Key Elements of a Buy-Sell Agreement
Buy-sell agreements contain several essential sections and provisions that clarify how the situations should be treated. Like most contracts, they have definitions , acknowledgments, and more. What makes them unique are the terms around triggering events, payouts, and valuation.
The key elements of a buy-sell agreement include:
- Element 1. Identify the parties
- Element 2. Triggered buyout event
- Element 3. Buy-sell structure
- Element 4. Company valuation
- Element 5. Funding resources
- Element 6. Taxation considerations
Your agreement may require additional sections, schedules, and attachments. Here is an article explaining buy-sell agreement considerations.
Who Needs a Buy-Sell Agreement?
Buy-sell agreements are typically used by business partners. However, a sole proprietor and a limited liability corporation (LLCs) may use them as well. Consider drafting buy-sell agreements anytime there are concerns over a critical partner leaving the business unexpectedly or through retirement.
The following types of business may be good candidates for buy-sell-agreements:
- Law firms
- Dental offices
- Doctor’s offices
- Physical therapists
- Auto mechanics
- Local retailers
- Other partnership agreements
Business partnerships and corporations are excellent choices. Here is an article featuring what to know about buy-sell agreements.
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Why You Need Buy-Sell Agreements
Several primary advantages exist when using a buy-sell agreement for your business. However, they broadly safeguard the rights and privileges of all parties when executed correctly. You will achieve a better result if you hire corporate lawyers to draft and negotiate the deal on your behalf.
Your business may need buy-sell agreements for the following reasons:
- Maintain business continuity
- Protect company ownership
- Mitigates the chance of dispute
- Relieves stress from the partnership
- Protects business assets
- Protects business owners and the business
Buy-sell agreements ultimately alleviate the concern over what happens if a partner leaves the business suddenly or retires. It is not a document you will refer to regularly, but it will offer a set of instructions if specific events occur.
Who Drafts the Buy-Sell Agreement?
Contract lawyers draft the buy-sell agreement. They can work with either party when drafting, negotiating, and executing the terms. It is recommended that each partner retain their counsel when entering into this type of contract .
Common Buy-Sell Agreement Mistakes
Mistakes when using a buy-sell agreement in your business could lead to legal issues down the road. It is better to thoroughly discuss the particulars of the contract with your partner, company, and shareholders and review it annually to ensure that it still meets your business goals and needs.
Common buy-sell agreement mistakes include:
- Not coordinating with the other parties
- Failing to select the proper buy-sell agreement
- Inadequately identifying triggering events
- Not accounting for provisions once the event triggers
- Using the wrong valuation methodology
- Not dealing with funding issues before signing the agreement
- Failing to properly establish the agreement’s financing terms
- Inadequate coordination of related property
- Using a template meant for another transaction
- Never revisiting the buy-sell agreement
- Not including real estate in the transaction
As you can see from the above-referenced list, there are several areas where legal errors can arise during the negotiation and drafting process. Plus, you need your document to comply with local, state, and federal rules for it to be enforceable. Unenforceable agreements don’t protect your rights or business.
Getting Help with a Buy-Sell Agreement
Getting help with a buy-sell agreement often goes beyond designating triggering events. These events could indirectly trigger mergers and acquisitions if a key member leaves. There are other documents that you could need to support your buy-sell agreement, including a bill of sale , confidentiality agreement , and non-compete agreement.
Small business law is complicated. Legal mistakes, such as inadequately negotiating terms and creating unenforceable documents, can cost you significant amounts of money in the future. Hire corporate lawyers to ensure that you are drafting a buy-sell agreement that makes sense for your situation.
Meet some of our Buy-Sell Agreement Lawyers
I focus my practice on startups and small to mid-size businesses, because they have unique needs that mid-size and large law firms aren't well-equipped to service. In addition to practicing law, I have started and run other businesses, and have an MBA in marketing from Indiana University. I combine my business experience with my legal expertise, to provide practical advice to my clients. I am licensed in Ohio and California, and I leverage the latest in technology to provide top quality legal services to a nationwide client-base. This enables me to serve my clients in a cost-effective manner that doesn't skimp on personal service.
I am a 1984 graduate of the Benjamin N Cardozo School of Law (Yeshiva University) and have been licensed in New Jersey for over 35 years. I have extensive experience in negotiating real estate, business contracts, and loan agreements. Depending on your needs I can work remotely or face-to-face. I offer prompt and courteous service and can tailor a contract and process to meet your needs.
Tim advises small businesses, entrepreneurs, and start-ups on a wide range of legal matters. He has experience with company formation and restructuring, capital and equity planning, tax planning and tax controversy, contract drafting, and employment law issues. His clients range from side gig sole proprietors to companies recognized by Inc. magazine.
For over thirty (30) years, Mr. Langley has developed a diverse general business and commercial litigation practice advising clients on day-to-day business and legal matters, as well as handling lawsuits and arbitrations across Texas and in various other states across the country. Mr. Langley has handled commercial matters including employment law, commercial collections, real estate matters, energy litigation, construction, general litigation, arbitrations, defamation actions, misappropriation of trade secrets, usury, consumer credit, commercial credit, lender liability, accounting malpractice, legal malpractice, and appellate practice in state and federal courts. (Online bio at www.curtmlangley.com).
Real Estate and Business lawyer.
Davis founded DLO in 2010 after nearly a decade of practicing in the corporate department of a larger law firm. Armed with this experience and knowledge of legal solutions used by large entities, Davis set out to bring the same level of service to smaller organizations and individuals. The mission was three-fold: provide top-notch legal work, charge fair prices for it, and never stop evolving to meet the changing needs of clients. Ten years and more than 1000 clients later, Davis is proud of the assistance DLO provides for companies large and small, and the expanding service they now offer for individuals and families.
Braden Perry is a corporate governance, regulatory and government investigations attorney with Kennyhertz Perry, LLC. Mr. Perry has the unique tripartite experience of a white-collar criminal defense and government compliance, investigations, and litigation attorney at a national law firm; a senior enforcement attorney at a federal regulatory agency; and the Chief Compliance Officer/Chief Regulatory Attorney of a global financial institution. Mr. Perry has extensive experience advising clients in federal inquiries and investigations, particularly in enforcement matters involving technological issues. He couples his technical knowledge and experience defending clients in front of federal agencies with a broad-based understanding of compliance from an institutional and regulatory perspective.