A buy-sell agreement is a way to plan for the transfer of shares or membership interests when an owner dies or leaves your company.
It may seem odd to think about that kind of thing up front, when you and your co-founders are still laser-focused on your new business. But the reality is that at some point, a founder will likely decide to leave, and working out the terms of that departure early on is your best bet for a smooth transition.
So what is a Buy-Sell Agreement?
A buy-sell agreement, also called a buyout agreement, states that upon a certain event — be it death, divorce, bankruptcy, or something else — the company or shareholders have a right or obligation to buy your portion of the business.
Why Sign One?
- To Protect Yourself
Imagine several years down the road, you decide to move on from your company. You no longer want to be involved in the day-to-day decision making, and you’d rather have cash in your pocket than ownership in the company itself. Your partners may want you to stick around, or they may be willing to part ways but without giving you any compensation. If you agreed on a buyout arrangement up front, you can walk away on good terms and with fair compensation.
Imagine several years down the road, you’re still working day in and day out to make your business prosper. You and your partner work great together — you’ve worked through some early disagreements and you’ve finally hit your stride. Then, imagine your partner passes away. His shares in your company get passed via the terms of his will, and while you’re waiting for that will to be administered, you can’t make any company decisions that would have required his vote.
Finally, probate comes to a close, and lo and behold your partner’s shares are now in the hands of his son, who has a completely different idea about how the business should be run. Your partner’s son has all the same powers as his father did — but you don’t get along with him at all.
If you have a buy-back agreement that requires the purchase of a partner’s ownership interest upon his death, you don’t have to worry about any of that. As soon as the partner passes, the agreement takes effect and you can buy out his portion of the business.
- To Plan For Your Estate
Imagine you’re on the other side of that scenario. You pass away and your business ends up in the hands of a relative or child who doesn’t appreciate it and can’t manage it. Unless it’s a family business you’re trying to pass along, wouldn’t you rather be able to distribute the cash value of your ownership interest to your heirs?
A buy-sell agreement can make that happen. You can provide that upon your death, your shares get purchased — either by the company or by other shareholders. You can even fund that agreement with a life insurance policy. The owner of the policy makes payments over time, and upon your death the proceeds are paid out to the company, which purchases your share — sending all that life insurance money to your estate.
