Frank, Margot, and Lillian formed the Anniston Gadgetry Company fourteen years ago. They followed all the proper procedures and filed the right paperwork – or so they thought. As they approached their fifteenth anniversary of operations, they learned the hard way that they should have signed a buy-sell agreement. Read on to learn more about what this agreement is and why you need it.
Buy-Sell Agreement Fundamentals
This agreement is a legally binding contract that is commonly signed by business partners. The language of the buy-sell agreement states what the company will do if one partner dies, retires, or leaves the business for any reason.
The two most common buy-sell agreements are:
- Cross-purchase Agreement. The remaining partners buy the exiting partner’s share in the business.
- Entity-Purchase Agreement. The company itself buys the departing partner’s business interest.
It may be best to prepare a buy-sell agreement while drafting the company’s formation documents. At that point, the partners generally are all on the same page about issues. Negotiating the terms of the buy-sell may be easier.
However, a buy-sell agreement can be put in place at any time.
Buy-Sell Agreement in Action
The transition period after someone leaves a business can be difficult. The buy-sell agreement can settle rough waters by providing direction to the remaining partners.
Some of the common situations where a buy-sell might be needed include:
- Death. The heirs of a deceased business owner may take over that partner’s business interest. Their interests may differ greatly from partners still in place, some of whom may have operated the business for years.
- Divorce. In a bitter divorce, anything goes – including a vengeful ex-spouse’s attempt to take a share of the business as part of a settlement.
- Retirement. The retirement of one business partner may pit remaining partners against each other as the power structure realigns.
In the case of the Anniston Gadgetry Company, Margot died in a boating accident. She left behind one heir, her 22-year old son Marco. Because there was no buy-sell agreement protecting the company, Marco took Margot’s place at the company. Unfortunately, he did not share the beliefs of the other two owners. As the company was adjusting to Margot’s loss, Frank’s wife filed for divorce. His share of the business may now be in jeopardy, as well as Lillian’s. A buy-sell agreement may have protected the company from harm in the face of death and divorce.
Does Your Company Have a Buy-Sell Agreement?
Don’t leave your company’s future to chance. Talk to an attorney about preparing a buy-sell agreement.
Attorney Bruce Adams assists clients like you with their business matters. Call us at 256-237-3339 to schedule an appointment. We are located in Anniston, Alabama, but represent clients in surrounding Calhoun, Cleburne, Etowah, and St. Clair Counties.