Important Provisions That Should Be Included in Buy-Sell Agreements
Succession planning is a prudent step to ensure the longevity of your business. Whether you are considering starting a new business with a partner or already have an established business, you can consider formulating a buy-sell agreement as a part of your future exit strategy. Buy-sell agreements are one of the ways to create an orderly plan for ownership transfer with pre-negotiated terms. You can avoid complications with this well-defined exit strategy in the best interests of your business.
Overview of a Buy-Sell Agreement
Buy-sell agreements are documents drawn between two or more business partners. It outlines what will happen to individual business interests if any partner leaves the company unexpectedly. You can avoid ugly disputes with your partners by having an agreement in place beforehand. This will also prevent disruptions to the business from a loss of a partner.
Buy-sell agreements are helpful in a wide range of scenarios, including:
- Partner being forced out or terminated
- Partner resigning
- Partner retiring
- Partner suffering permanent disability
- Partner filing for bankruptcy
- Death of a partner
Your business could land in major trouble in any of these scenarios without a buy-sell agreement in place. For instance, if a partner gets divorced, the former spouse may get their hands on the partner’s interest in the business. This can create a lot of trouble for your business. Buy-sell agreements can provide a ready remedy in such scenarios.
Importance of Valuation Clause
The agreement should include detailed information regarding the worth of the business. You should ensure these numbers are absolutely accurate. You may want to have the company professionally appraised or use a clearly defined formula for obtaining the value of the business.
It’s expensive to have a business appraised. You need to consider the best strategy for all parties involved as well as the business. The valuation provision should clearly state the value of the business and a fair purchase price. This will help in avoiding suspicion and conflicts of interest.
Provisions for Funding the Buy-Sell
The Buyer should have the financial ability to fulfill the payment terms listed in the agreement. Installment payments and life insurance policies are popular funding options for buy-sell agreements besides cash sales.
You shouldn’t assume the Buyer will have the necessary cash at the time of the purchase. In fact, many people find it difficult to borrow 100% of the purchase price as well. There are several other options that a Buyer can use for making the payments. It is important to consider the individual benefits and limitations of each option.
Identification of Parties and Qualifying Events
A buy-sell contract requires at least two parties for it to be valid. There has to be a Seller and a Buyer. This may seem obvious enough. Based on this, choosing the Buyer requires careful consideration. It would also require the consent of all other parties in the business. There may be licensing requirements and legal obstacles to consider depending on the type of business.
You should speak with your partners or any other outside buyer to discuss the qualifying events. These are the events that will trigger a buyout. You should work with an accomplished attorney to anticipate any life events, which may interfere with the partnership. This can be illness, divorce, retirement, and death. Don’t forget to include breach of contract and obligations.
The goal should be to cover all bases so that everyone’s interests are protected in case of a buyout. It’s critical that the buy-sell agreement is in line with the estate plans of each partner. This will prevent any conflict in purchasing the share of a deceased partner’s business. You don’t want to get caught in the middle of a costly dispute among the heirs of the deceased partner.
Understanding Tax Implications
You should understand that the proceeds of any purchase and sale of business ownership are taxable. You should work with your accountant and attorney to structure an agreement that minimizes the tax liability. You may end up having a higher tax liability if you do not. This may just offset any profits from the proceeds.
Having an attorney on your side can be helpful since a buy-sell agreement has to account for a broad range of possibilities. Any mistake made in the document can cause a major headache at a later date. You can ensure your interests are protected by having the buy-sell agreement drafted by an attorney. This will also help in minimizing any potential hassles if a partner decides to leave. Lawyers can ensure that the buy-sell agreement complies with the necessary laws affecting your business.
Choose a Qualified Business Law Attorney in Alabama to Protect Your Business Rights
There are numerous things that need to be taken into account while drawing up a buy-sell contract. The time and efforts you invest right now in the process will ensure the longevity and health of your business in the long run. The attorneys at BHM Law Group will do everything possible to ensure you and your family receives the maximum benefit from your years of hard work. To schedule your free and confidential consultation with us, call us at (205) 994-0902 or write to us online.