What Should be Included in a Buy-Sell Agreement?

Buy-sell agreement
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A buy-sell agreement can protect a small business.

Business owners have a lot to think about.

Their daily concerns include customers, employees, and finances.

In fact, they are the last one’s to get paid each month (if then).

With the constant demands on their attention, business owners can forget to consider what will happen when they die.

Failing to develop a succession plan places their entire business in jeopardy.

According to a recent  Philadelphia Business Journal article titled “Why does your business need a buy-sell agreement?,” a buy-sell agreement protects the company, the employers, the owners, and their families.

A buy-sell agreement can keep a business running after the death of the owner.
A buy-sell agreement can be an important component of a succession plan.

What does a buy-sell agreement accomplish?

It identifies possible triggering events and outlines conditions and terms for how people will move into or out of ownership status with the business.

A solid agreement will address variety of events.

Events to consider in a buy-sell agreement are divorce, death, disability, retirement, personal bankruptcy, voluntary termination, and involuntary separation.

What should be included in the agreement?

The agreement should outline the percentage and type of ownership, valuation of shares, and insurance proceeds.

Value and terms of payment are especially important.

When discussing provisions for a buy-sell agreement, there are several items to consider.

What are they?

You will need to decide how to notify shareholders of a voluntary termination.

You also need to protect existing shareholders in the event of a “liquidity” event.

Think disability or death here.

If there is non-compliance of notification provisions, you may need to provide extended payment terms or discounts on value.

You may want to create provisions for existing shareholders to reassign beneficiary designations from insurance after payments have been made to the existing shareholder.

If your company created a buy-sell agreement a decade ago or longer, it is time to review and update your succession plan.

It is likely your business has faced some significant changes over the years.

Although it is tempting to put off the creation or review of a buy-sell agreement because the daily responsibilities of running a business seem more urgent, the consequences of neglecting this planning are great.

Too much is at stake.

Reference: Philadelphia Business Journal (Sep. 1, 2021) “Why does your business need a buy-sell agreement?”

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