Whatever your business, from A to Z, you need to consider a buy/sell agreement if you’re in ownership with another person. Doing so could save both you, your business, and your family a lot of major headaches in the long run.
If you’re in business with anyone other than yourself, a buy/sell agreement is a highly recommended legal document to add to your corporate record book. Sometimes a buy/sell agreement is referred to as a “business prenup”. While this term has no legal bearing, it’s a great phrase to help people understand how a buy/sell agreement operates.
Buy/sell agreements exist to accomplish a smooth transition of ownership when a business owner dies, retires, or decides to exit the business. A buy/sell agreement also usually requires that the interest of the departing shareholder either be sold to the existing shareholders or redeemed by the company. Therefore, buy/sell agreements fall into one of two categories.
In a cross-purchase agreement, the remaining owners purchase the outstanding shares of the departing shareholder. The shares are then appropriated, usually in equal parts, to the remaining shareholders. But in a redemption agreement, the business entity buys the shares of the business from the departing shareholder. In order to ensure that the funds are available for this type of transaction, it is highly recommended that the entity purchases a life insurance policy on its owners. What if you’re a sole proprietor? In this case, it’s recommended for a key employee or family member to obtain the life insurance policy so that the business can continue operating.
There are other key considerations to think about in a buy/sell agreement. In the event of a 50/50 tie between the shareholders, who wins? If you cannot come to an agreement and your operating agreement is silent on the matter, then in some states, this could be grounds for dissolution of a business! Another usual clause states that any sale of interest must first be offered to the company or existing shareholders. This is extremely important because it provides insiders a chance to acquire more interest in the company before outsides are allowed. Some buy/sell agreements may completely ban the sale of a deceased owner’s interest to an outsider.
Whatever your business, from A to Z, you need to consider a buy/sell agreement if you’re in ownership with another person. Doing so could save both you, your business, and your family a lot of major headaches in the long run. At Hampleman Law, LLC, we’re able to provide you with customized buy/sell agreements at a flat fee. Please contact our office for an initial, no cost consultation if you have any questions about buy/sell agreements or any other matters related to your business.