woman signing a buy sell agreement

Should I Have a Buy-Sell Agreement in Place?

There may seem like an endless number of legal documents to consider, have drafted, and executed for your business. Yes, there can be a significant amount of paperwork, but there is also a great deal in business that you will want to protect, including the business itself. Planning for contingencies, for instance, can help ensure the longevity of your business and avoid devastating legal battles. Do the work on the front end to put critical protections in place that will help your business weather even the roughest of storms.

Take the buy-sell agreement, for example. This legally binding contract puts stipulations in place that will direct how a business co-owner’s interest will be reassigned should a particular event occur, such as divorce, bankruptcy, or death. These are all events that can send the future of a business into a void of unknowns. A buy-sell agreement, however, can help prevent a business from falling into such a void.

Should I Have a Buy-Sell Agreement in Place?

When you co-own a business with others, your business’s fate lies with them just as much as it lies with you. It can be scary to consider. A buy-sell agreement, sometimes referred to as a “buyout agreement,” can manage some of the more anxiety-inducing situations that may come up because of what is happening with a co-owner. For instance, what happens if a co-owner dies? What will happen to his or her business interest? This can be dictated in the buy-sell agreement. More often than not, the agreement will stipulate that his or her shares are to be sold to the remaining business co-owners.

While a co-owner going through a divorce may seem like a strictly personal matter, there are also potentials for the business to get wrapped up in things as well. As the divorcing owner’s business interest may be thrown into the mix of marital assets subject to division during divorce proceedings. What happens if the soon-to-be former spouse ends up with an interest in the business? This can be avoided with a buy-sell agreement in place. The buy-sell agreement can provide that, should a co-owner go through divorce and business shares be directed to go to the former spouse, the former spouse must sell the shares back to the co-owners at a designated rate.

What if one of the co-owners goes through some financial difficulties and plans to file for bankruptcy? Will the co-owner’s business interests come into play in bankruptcy proceedings? It is a possibility. In an extreme example of what could happen, the bankruptcy trustee may direct for the sale of the entire business so that the co-owner’s business interests can go to pay off outstanding debt obligations. With a buy-sell agreement, however, the agreement can require a co-owner to inform the other co-owners prior to filing for bankruptcy. Furthermore, the agreement can direct the filing co-owner to sell back his interest in the business to the other co-owners prior to filing. The proceeds from this transaction would go to the bankruptcy trustee.

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