DOES YOUR BUSINESS HAVE A BUY-SELL AGREEMENT?
By: Daniel J. Fetter, Esq.
In the context of a closely held business (be it a partnership, limited liability company or corporation), a Buy-Sell Agreement is highly recommended to address what happens to an owner’s business interest upon the occurrence of certain “trigger events”, which typically include a partner’s death, disability, voluntary or involuntary termination of relationship and retirement.
A Buy-Sell Agreement is often compared to a prenuptial agreement between business partners. First, as with a prenuptial agreement, which sets forth each spouse’s rights and obligations in the event one spouse wants to leave the marriage, a Buy-Sell Agreement sets forth each owner’s rights and obligations (and the entity’s rights and obligations) if an owner voluntarily or involuntarily leaves the business. Second, business partners should enter into a Buy-Sell Agreement prior to starting the business venture.
Some of the main objectives of the Buy-Sell Agreement include: (1) designating a buyer or buyers that are authorized to purchase an owner’s interest upon the owner’s death, disability, termination, retirement, etc.; (2) protecting the owner or his/her estate from being locked into an interest in a closely held business; (3) providing a source of funds with which to pay estate taxes or to generate income for the terminated owner or his/her family; (4) preserving control of the business with the remaining owners; (5) precluding owners from selling their business interest to third-parties without the consent of the other owners; and (6) providing a value for the purposes of estate taxes.
A Buy-Sell Agreement may also contain post-termination prohibitions against competing with the business, soliciting customers and employees and against using the proprietary information of the business.
A “handshake” understanding between business partners welcomes uncertainty and potential conflicts among family members and co-owners. Accordingly, having a type of legally enforceable, written agreement in place in the form of a Buy-Sell Agreement establishes the necessary transition plan in a much more certain and less conflict prone manner. Once in place, Buy-Sell Agreements should be periodically reviewed and updated as the situations of both the business and its owners change over time.
Buy-Sell Agreements must be considered in conjunction with not only a business owner’s business plan, but also that individual’s overall financial and estate plan to ensure advantageous tax treatment, creditor protection and other benefits.
If your business does not have a Buy-Sell Agreement in place, or has one that has not been reviewed recently, please contact Daniel Fetter or the attorney at our firm with whom you work.
This article is intended to be for informational and discussion purposes only and is not to be construed as legal advice or as a legal opinion on which certain actions should or should not be taken.
