When you establish a good business partnership, it can last for decades – but all good things eventually come to an end. That’s why you need a buy-sell agreement between you.
A buy-sell agreement (or “buyout” agreement) governs the eventual transfer of a departing partner’s ownership interest in the business to another according to predefined triggering events.
Why are buy-sell agreements so important?
Business partners leave for all kinds of reasons, but the events that usually trigger a buy-sell agreement are things like the partner’s death, permanent or long-term disability, retirement or just their desire to sell. Here’s why a formal buy-sell agreement is needed well in advance of those circumstances:
- Maintaining business continuity: A buy-sell agreement helps prevent disruptions in the business by outlining a clear roadmap for the transition of ownership so that the departure of a partner does not lead to chaos. Orderly transitions help customers, employees and other business associates from pulling away.
- Avoiding disputes: When a partner decides to leave, disagreements regarding the value of their interest in the company or the terms of the buyout can arise. A well-drafted buy-sell agreement minimizes the potential for disputes because everybody knows what to expect well in advance.
- Providing financial security: The agreement addresses the financial aspects of the buyout, such as the valuation method for the departing partner’s interest and the funding mechanism for the buyout. This clarity provides financial security for both the departing partner and those who remain.
- Restricting ownership transfers: Buy-sell agreements often include provisions that restrict the transfer of ownership interests to third parties without the remaining partner’s consent. That can make certain you aren’t forced into a partnership with someone you don’t want involved in your business.
Business partnerships come and go, so it’s always important to make sure that you have a game plan in place for if that happens to you. Seeking legal guidance can help you make certain that your agreements are fair to everyone involved and that nothing important is overlooked.