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Key Considerations in Drafting a Buy-Sell Agreement

Key Considerations In Drafting A Buy-Sell Agreement

Need to put together a buy-sell agreement for your business? Do some advance planning and make sure you know what to include before you head over to an attorney’s office to review the document.

The primary reason for having such an agreement in place is that it clearly defines how changes in the future of the business will impact both control of the company and the people in management at the time the change occurs. Once signed, this is a legally binding document with stipulations listed inside known as “trigger events” that can influence the company.

Without a buy-sell, your company is at risk. The purpose of this document is to protect you and your business. It can be a critical document to prevent future arguments between owners of the company. Sudden events like the death of a shareholder can cause a lot of confusion and conflict if a buy-sell agreement is not in place.

The best way to approve a buy-sell is by thinking about a range of questions, such as:

  • Who are the key people involved in the ownership and the running of the business?
  • What will happen to compensation or non-compete agreements in the event that a business owner departs?(whether voluntarily or non-voluntarily)
  • What are the triggering events, and how will they impact business operations? Trigger events might include employment termination, the dissolution of a marriage, death, retirement, and disability.
  • Is there a specific way that disputes between owners should be addressed?
  • Can an owner sell to an outside party or prevent the sale of the business stock according to the agreement?
  • How can a buyout be funded? Does it require down payment, collateral, or interest?
  • What kind of insurance policy will be used, if necessary? Who will retain ownership of the policy and what person will be named as the beneficiary?
  • What will be used to determine the actual value of the business? Is a formula outlined in the agreement or does it require the interference of an outside party?
  • Are there any tax implications of triggering events?

As you can see, there are a whole host of questions that need to be answered in the process of putting together a buy-sell agreement. It can feel overwhelming to incorporate this into your small business planning, and yet it will likely pay off down the road in a big way by limiting the disputes among owners and managers when a triggering event occurs.

To start wading through the drafting of your buy-sell, you need to evaluate both the short term and long term objectives for the company itself. Visioning is a powerful exercise that not only lets you reflect about where you’ve been but also about where you want to go.

Before you meet to draft the document, every party should already be willing to agree to the terms. It can be difficult to get everyone on the same page, but it will save you a lot of frustration and headaches to sort this out before you put the agreement together. You should also consult with a tax attorney during this stage so that everyone is aware of the tax implications of terms within the agreement and to learn about possible other strategies that may be able to mitigate tax obligations.

During these initial stages it’s easy to think about how to limit conflict, but you have to expect that even in the best of planning situations, conflict can emerge. Include terms within the agreement for how conflict should be handled in the future. Just as with other provisions, outlining the terms now helps to clarify and provide a course for handling specific circumstances.

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