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Why It Is Important to Have a Buy-Sell Agreement in Place

Published on Jan 25, 2013

Summary

Read 'Why It Is Important to Have a Buy-Sell Agreement in Place' at 'Time to Start Up,' the small business blog by BizFilings.
You share ownership of a small business with a friend. The company is thriving,  The sky is the limit. You believe the two of you will be co-owners for decades, well into retirement. Situations change. A life event, like a divorce or a disability can alter this fanciful picture. Resentment builds. The working relationship becomes intolerable. If a Buy-Sell Agreement is in place, then a solution is at hand. The pain is quick and over. If there is no such document, you could have a long-term problem that ultimately shutters your business. Just what is a Buy-Sell Agreement? It 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. It should address when owners can transfer their ownership of a company and to whom they may make the transfer.  It also should also cover how the price of the owner’s portion of the company will be determined and the procedure that will be employed in the case of a buyout of one owner for any circumstance.

Who Needs a Buy-Sell Agreement?

As illustrated in the various scenarios above, the most obvious time to have such an agreement is when there is more than one owner. Unless the only other owner is your spouse, your company should have a Buy-Sell Agreement in place, according to the Small Business Administration.  This is true, even if the company has one majority owner and multiple minority owners. While the aforementioned life events can be problematic for a business, the death of an owner can be even more challenging. Let’s say a small business is owned equally by four individuals, and one individual dies, the other three owners might assume they could purchase their partner’s share of the company and continue operations as usual.  This would be a faulty assumption since the deceased partner’s share would likely be included in his or her estate. This can create a protracted and complicated purchasing process for the living business owners. Finally, it is imperative that such agreement provide the requisite specificity, according to Kyle Taylor, the managing partner of Thriving Interactive. “It is important that the owners clearly state the business assets and the terms under which the transfer of those assets may occur,” said Taylor.