If you’re a business owner, planning for the future is an important step to protect yourself and your business. A buy-sell agreement is a written contract that provides a plan for transferring any owner’s business interest. Buy-sell agreements address what will happen should an owner leave the company.
The best time to create a buy-sell agreement is now. The attorneys at Jones, Gregg, Creehan & Gerace LLP can help you create a comprehensive, legally enforceable buy-sell agreement. We understand that unplanned events, such as a dispute between business partners or the death of a business owner, can happen unexpectedly. Setting up a buy-sell agreement now can help you protect your business in the future.
Do I Need a Buy-Sell Agreement?
A buy-sell agreement can be a critical legal document for any business with multiple owners. It should include provisions that address various contingencies to help ensure smooth ownership transitions should a partner pass away or leave the company. Creating a buy-sell agreement can help your business enjoy a smoother transition and continuation of operations.
Buy-sell agreements are ideal for businesses with two or more owners who want to protect their business in the event of any owner’s termination of employment, divorce, retirement, disability, or death. If you are a co-owner of a business and your business doesn’t have a buy-sell agreement, or you haven’t reviewed the agreement in years or after a significant life event, discussing the buy-sell agreement with an attorney can be helpful. Taking the time to create or update a buy-sell agreement can help you ensure that there is a straightforward, legally enforceable method to transfer any owner’s business interests.
The Benefits of Creating a Buy-Sell Agreement
A buy-sell agreement is a legally enforceable contract that provides a clear plan for the orderly transfer of one or more owners’ business interests. It can keep stock away from undesirable future owners. For example, the agreement could prevent an ex-spouse of a divorcing owner or the heir of a deceased owner from taking ownership. A buy-sell agreement can also ensure that there is a reliable, specific process for how ownership interest will be transferred.
After they’ve created a buy-sell agreement, owners can rest assured that there is a fair method they can use to value the departing owner’s stock for estate planning. They can also use a funding method to facilitate the purchase of the deceased or leave the owner’s interest to other owners. Additionally, the buy-sell agreement can include provisions for how owners should be removed under specific circumstances, such as committing fraud. The agreement can also include any number of governance or other unique provisions that ensure the continuity of the business operations.
Determining Valuation
An evaluation should occur when a partner or business owner leaves the business or passes away. The buy-sell agreement can clearly state how the partner’s ownership should be valued if she or he leaves the company or passes away. Stating how the valuation should occur can help prevent disputes in the future. The evaluation should consider the fair market value of the company’s assets, liability, and future revenue.
However, valuation should also include the company’s intangible assets, such as trade secrets, trademarks, patents, and goodwill. A few different methods are commonly used to determine a company’s valuation. Jones, Gregg, Creehan & Gerace LLP can help you determine the best way to conduct an evaluation when creating your buy-sell agreement.
What Happens When a Spouse or Heir Takes an Interest in the Company?
The buy-sell agreement should also address what will happen if an owner’s spouse or child takes over his or her interest in the company after his or her death. Ultimately, you and your fellow co-owners will need to decide what will happen in these types of scenarios. For example, what will happen if a spouse of a divorced owner takes half of the owner’s interest as part of the divorce settlement? You and your co-owners may not want to be in business with the ex-spouse of one of the other owners.
A carefully written buy-sell agreement can address these types of situations. Our attorneys can help you think through the different scenarios so you can include specific guidance about transferring ownership shares that align with your goals. For example, many buy-sell agreements include a provision that allows current members to veto a potential buyer or owner. This type of provision can help you prevent someone from obtaining an ownership interest in your company whose main goal is to break up and sell the business. You may want to include a provision requiring all current owners to vote on a potential new owner.
Financing Considerations in Buy-Sell Agreements
Cash flow is an essential aspect of managing a successful business. Should a member of the LLC force a sale, he or she could cause considerable hardship for the company. The buy-sell agreement can set up a structured sale to ensure a payoff with some cash upfront. The remaining expenses can be financed over time. Establishing provisions for financing in the buy-sell agreement can help all owners understand the structure of a future sale should one or more want to leave the company.
Contact an Experienced Buy-Sell Agreement Attorney in Pittsburgh
Understanding what legal steps you should take to protect your business is an important consideration when forming a business. At the law firm of Jones, Gregg, Creehan & Gerace LLP, we have a dedicated team of attorneys with extensive experience handling a wide range of business matters. Our full-service commercial law firm provides legal counsel in litigation, tax law, and commercial transaction matters.
We have the resources and in-depth knowledge to help you draft and negotiate an effective, comprehensive buy-sell agreement. Don’t hesitate to contact Jones, Gregg, Creehan & Gerace LLP to schedule a complimentary case evaluation and learn more about how we can help you.