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Four reasons to establish a buy-sell agreement

On Behalf of | Oct 2, 2023 | Business Transactions

A buy-sell agreement helps prevent future problems if there is a change of ownership at your business. Through this legal document, you establish a plan for what happens if an owner retires, moves on, becomes disabled or dies.

Without a buy-sell document, your company could face difficulties with taxes, finances and legal issues down the road. The following provisions can make a difference when you must transfer ownership from a partner, shareholder or other owner.

Create an exit plan

Splitting up a partnership, whether business or personal, has the potential to get messy. Former partners may find it hard to agree on terms without them in writing. A buy-sell agreement spells out conditions for owners leaving the company. This reduces headaches and financial risks by planning ahead.

Establish fair value for shares

A buy-sell agreement sets a fair price for a share of the business. This comes in handy if an owner wants to stay after another partner leaves, as it helps avoid disagreements about whether a buyout offer seems fair. The partners agree on valuation figures ahead of time in the agreement. This lowers the risk that someone expects more money than their share is worth.

Keep interests with remaining owners

Without a buy-sell agreement, unexpected new partners could enter the business. Just like a will decides who inherits belongings and money, the buy-sell agreement states who gets a share if an owner cannot continue. Otherwise, their next of kin may take over part of the company, a choice you and your other co-owners may not approve.

Promote continual operations

Unnecessary disruptions to business functions can interrupt productivity and even lead to financial disorder. Any unforeseen departure or sale of a share could result in this kind of chaos. With a continuity plan established in a buy-sell contract, employer and worker responsibilities stay clear despite any transitions between owners.

According to Biz Journals, over 50% of businesses with partners do not even possess a buy-sell agreement. By establishing conditions to transfer ownership, your business could last longer as opposed to other operations that might falter due to a loss of a shareholder.