Entering a partnership with a friend, colleague, or family member can be exciting. But it’s essential to establish a solid foundation and protect the interests of all parties involved. You can achieve this with a buy-sell agreement.
“In order to fund a buy-sell agreement adequately, you have to know what the business is worth. It’s important for business owners to get a reliable valuation done on the business and to update it every so often. The agreement might require it, and even if it doesn’t, it’s how you ensure a fair purchase price, no matter how much the business grows.”- Kathleen Cassidy | Vice-President, Advanced Markets | Barnum Financial Group
A comprehensive buy-sell agreement outlines potential conflicts during the buying and selling process, safeguards all stakeholder interests, and mitigates legal and financial consequences of the sale or purchase.
ELEMENTS OF A BUY-SELL AGREEMENT
A buy-sell agreement covers five essential ownership transition elements, known as the 5-Ds. Each factor protects the interests of all parties involved and ensures the business's success when change becomes inevitable.
DEATH
A buy-sell agreement addresses an owner’s untimely demise by outlining the fate of the deceased's stake. Partners may agree to transfer their shares to the remaining members, the business entity, or a designated beneficiary. Ownership changes can complicate leadership dynamics and destabilize operations, finances, and cohesion in an organization, especially if the surviving spouse or children inherit the ownership stake.
It’s crucial to permit a buyout of the new beneficiary's stake to maintain stability and continuity. You can mitigate any concern by making sure the agreement is properly funded. This often includes some combination of insurance policies on the lives of the partners, installment payments, or a sinking fund to accumulate funds over time.
DISABILITY
Incapacitating illness or disability can disrupt productivity and responsibility dynamics in a business partnership. A well-crafted buy-sell agreement ensures fairness for all parties when a disabled partner and a business part ways.
Include provisions in the agreement to define conditions under which a partner can or must purchase the ownership stake of a member with a disability. Determine the buyout price. Consider factors like the partner's contribution to the business and the impact of their disability on the company's operations.
DIVORCE
A business partner's spouse may assert ownership rights to the company during a divorce, complicating the business partnership. You can include provisions in the buy-sell agreement for divorce to avoid potential disputes regarding share and asset distribution, protect the business's stability, and preserve the remaining partners' interests.
DEPARTURE
There are many reasons why someone would leave a partnership. They may want to move on to new ventures, they may no longer have the capacity to handle their responsibilities, or they may even retire. Change is always part of a business, but few things are as detrimental to a business partnership as having an unreliable partner who lacks dedication and availability.
A buy-sell agreement can make provisions for unavailable partners by facilitating their departure or reducing their stake in the company to match their participation. Outline consequences, such as reduced ownership or buyout options, ensuring partners don’t unfairly shoulder the burden of slacking members. Clear guidelines and expectations in the agreement help mitigate conflicts and maintain the overall effectiveness of the partnership.
DISAGREEMENT
In a business partnership, disagreements can arise unexpectedly, leading to a breakdown in the working relationship. However, you don’t have to wait for disputes to become insurmountable to consider the business's fate.
You can include provisions in the buy-sell agreement for options to resolve conflicts, including mediation, arbitration, or even a buyout clause. Structured and fair resolution strategies allow partners to move forward, minimize the negative impact on the business, enable partners to navigate disagreements more effectively, and foster a productive business environment.
WE CAN HELP
So, if you’re starting a business, consider a buy-sell agreement to protect you and your partners from any potential future financial concerns. Team SKG is always ready to help safeguard you from the 5-Ds and get your business on the path to success.
Neither MML Investors Services nor any of its subsidiaries, employees or agents are authorized to give legal or tax advice. Consult your own personal attorney, legal or tax counsel for advice on specific legal and tax matters.
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