Even the most stable companies go through changes. It may be due to retirement, divorce, bankruptcy, or pursuing other opportunities. Business partners can plan for these inevitabilities, however, by including a buy-sell agreement alongside other essential business documents.
What is it?
Known as a business prenup or a buyout agreement, a buy-sell agreement outlines how changes in partnerships will happen. They can be drafted at any time, but it is often helpful to have in a file. It can provide peace of mind in that there is a predetermined plan of what happens when things change. It can address such issues as:
- The percentage of the business owned by the partner
- Whether a departing partner is bought out
- Who can buy the departing partner’s share (outside people or preexisting partners)
- What initiates a buyout
- How to value the departing partner’s interest
Helps avoid uncertainty or disputes
Even if a buy-sell agreement sits in a drawer, it remains a clear reminder to partners of their business arrangement. It may hasten one’s departure. It can also act as a plan to keep the company open for business. It can help avoid time-consuming and costly disputes between the departing partner and the remaining team, or amongst the remaining team members. It can also help prevent mistakes that force a viable business to dissolve.
It is best to have a plan
Successful plans rarely go exactly how they were drawn up, nor does every buy-sell plan consider every eventuality. Nevertheless, it is a good starting point during a time of transition. They can be complicated or straightforward, but they should always reflect the foreseeable needs of the business and its partners.