A buy-sell agreement (also referred to as a “business prenup”) is a contract between owners of a company that states what will happen to the business if an owner passes away or leaves the company. The agreement controls how the owners of a business can sell their interests in the business, who they can sell them to, when they can sell them, and how much they can sell them for. A buy-sell agreement is utilized most by closely-held companies as it’s a great way to assure that the business remains with the current owners (or “in the family”) rather than allowing standard corporation or partnership rules control what happens.
Without a buy-sell agreement, a business can face a bunch of problems when one owner leaves the company, is divorced, becomes bankrupt, disabled, retires, or dies. A well-written buy-sell agreement can dictate what happens when each of those events take place. Although this agreement can be created at any point, it’s recommended for business owners to execute an agreement at the same time of, or soon after, incorporating.
Although you may be able to do this yourself, there is a chance you will make a mistake, overlook something, or simply take a path that is not the best for your company. A buy sell agreement lawyer is a safe-guard against these problems.
You have an attorney to turn to
There’s a good chance you’re going to like your attorney from LawTrades and want to keep using him / her. Also, it may help to turn to the lawyer who drafted the agreement when an event triggers it.
You won’t forget anything
There are many events that can trigger a buy-sell agreement. There are also a lot of other terms to include in a buy-sell. A buy sell agreement lawyer will assure all the points are hit.
Can I use a template I found online?
I wouldn’t recommend it. A buy sell agreement should be custom-drafted and particular to your company and co-owners. A buy sell agreement lawyer should guide you in this process as the needs of each company and its owners are unique.
What are the different types of buy-sell agreements?
There are three types of buy sell agreements. The first is a redemption agreement where the entity (rather than the other owner) is required to purchase the departing owner’s interest. Another type is a cross-purchase agreement where the remaining owners are required to purchase the departing owner’s interest. Lastly, there is a hybrid agreement where the departing owner’s interest is first offered to the remaining owners and if they choose not to purchase the departing owner’s interest then the entity is required to purchase this interest.
What type of business entity is a buy sell agreement intended for?
A buy sell agreement can be used for all business entities, including C-Corps, S-Corps, and LLCs.
Must a buy-sell agreement ever be updated?
A buy sell agreement should be updated if there is a change in circumstances such as a new owner, new spouse of an owner or other personal matter.
How does a company formulate its value when a buy-sell agreement is triggered?
It’s important to include a valuation formula in the buy sell agreement. This allows owners to discuss and vote on the how the company should be calculated. Failing to do so can cause a ton of controversy, including litigation costs and having to hire a professional appraiser.
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