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Buy-Sell Agreements: Does My Business Really Need One?

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Buy-Sell Agreements: Does My Business Really Need One?

By AshleyC
Published: July 19, 2011

By Ashley Cassels

What is a Buy-Sell Agreement and why do I need one?

A Buy-Sell Agreement is a contractual document that creates rules for what will happen when a business owner needs to transfer his or her interest in the company or when a business owner ceases to be an owner of the business for any reason. 

How do I know if I need a Buy -Sell Agreement for my business?

Does your LLC have multiple owners?  Unless the only other owner is your spouse, your company should have a Buy-Sell Agreement in place.  This is true, even if the company has one majority owner and multiple minority owners.  The Buy-Sell Agreement can either be a section of your company’s operating agreement or a separate document. 

If a small business is owned equally by three individuals, and one individual dies, the other two owners might assume they could purchase their partner’s share of the company and continue operations as usual.  It is common, however, in the absence of a Buy-Sell Agreement, for the partner’s share to be included in his or her estate, which can create a much longer, more complicated purchasing process for the living business owners. 

Situations such as this one illustrate the importance of having a Buy-Sell Agreement in place before an effect affecting business ownership occurs. 

What’s included in a Buy-Sell Agreement and why is it important to use it?

Certain events can trigger the use of a Buy-Sell Agreement.  These can include: death of a business owner, disability of a business owner, voluntary or involuntary termination of employment of a business owner, retirement of a business owner, or loss of a professional license or incarceration of business owner.  Company owners can also come together and choose to write in other specific events that will activate the Buy-Sell Agreement. 

A Buy-Sell Agreement should include when owners can transfer their ownership of a company and to whom they may make the transfer.  It should also cover how the price of the owner’s portion of the company will be determined and the procedure that will be used in the case of a buyout of one owner for any circumstance.   

How Would I fund a Buy-Sell Agreement?

If a business is owned by three people and one owner dies, how will the other two owners afford to purchase the deceased owners shares? This can require having a significant amount of cash on hand, and having an agreement in place in advance can give some assurance. 

Many businesses solve this problem by funding their Buy-Sell Agreement through insurance, in the case of death.  There are many companies that offer insurance policies that cover Buy-Sell Agreements.  

Are companies required to have a Buy-Sell Agreement in place?

While the agreements are good to have in place, they are not required for LLCs. However, if your business has multiple owners, it is a good idea to create a Buy-Sell Agreement as soon as possible. 

And it is always smart to consult professional advisors, including an attorney, accountant and insurance agent before finalizing the Buy-Sell Agreement.

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Comments:

Buy-Sells are important for both parties so one gets compensated and one can keep the business running

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