When friends become business partners or co-shareholders, the future often looks infinitely rosy. Unhappily, business owners are also human beings, and disputes can erupt over the most insignificant events.
Some businesses have procedures for smoothing these bumps in the road, while others while others can experience the bump as a cataclysmic shock to the business that can cause a severe rupture in the relationship of the owners.
In order to prevent such shocks, prudent business owners create a buy-sell agreement at the same that they organize the business.
The basics of a buy-sell agreement
In its simplest form, a buy-sell agreement enumerates the occurrences that can give one partner the right to purchase the interest of the other partner. A competently drafted buy-sell agreement must contain other clauses.
One of the most important provisions is the identification of a process for determining the value of the business (and, hence, the value of each partner’s share) and specifying a method for paying the buy-out price.
An experienced business attorney can suggest several methods for resolving this issue, including having the company’s chief financial officer determine the value, using the company’s accounting firm to perform this function, or retaining a business appraiser to set a value.
Trigger clauses
The next most crucial issue is to decide on which event will give rise to – i.e., trigger- the right to insist on a buy-out.
This clause must be carefully and completely discussed by the owners of the enterprise. Some provisions will allow the owners to force the resignation of one of the other owners, and others will permit a single equity owner to withdraw from the business under specified circumstances.
Financing the purchase transaction
For any business that has operated successfully for several years, financing the payment of the purchase price can be stressful.
Many buy-sell agreements use insurance on the principals’ lives to provide funds to pay the purchase price. Many other devices can be used successfully.
In drafting such a clause, the principals may wish to seek advice from the company’s accountants or chief financial officer.
Conclusion
The most important consideration in entering into a buy-sell agreement is to make certain it happens. Too many businesses leave this detail of organization until it is too late.
While asking an attorney to draft a buy-sell agreement can add to the expenses of organization, the benefit from that expense can only be measured after a divisive occurred – and then it is too late.
