When should I develop my buy/sell agreement?
A buy/sell agreement should be one of the first articles that a company drafts as it is business necessity. A buy/sell agreement is a binding contract between you and your co-owners that defines who can buy a departing owner’s share of the business and establishes what price will be paid for that share.
Your buy/sell agreement will consist of several clauses that you and your co-owners choose — clauses that will instruct and remind you and your co-owners how to handle a potential sale or buyback situation during a change of circumstance. That change could be a shift to an owner’s personal life, such as death, divorce, or a financial problem. Or it could be the result of a business-related turn of events, such as a disagreement between co-owners. And, of course, at a time when many people demand that their work be both profitable and personally meaningful, it might occur simply because a co-owner feels like doing something else. A buy/sell agreement may act as a lifeline when there is:
- An attractive offer from an outsider to purchase an owner’s interest in the company
- A divorce settlement involving an owner in which an ex-spouse stands to receive an ownership interest in the company
- The foreclosure of a debt secured by an ownership interest
- The personal bankruptcy of an owner
- The disability or death of an owner
When one of these circumstances happens, your buy/sell agreement kicks in to protect your current way of doing business. For instance, you might choose to include a clause that states, ” If an owner decides to leave the company, the company shall have the right to buy that owner’s interest at the price stated in the buy/sell agreement.” This clause protects the remaining co-owners by eliminating the possibility that the owner who is pulling out will sell his or her share to an unsuitable new owner. You’ll select such clauses to go into your buy/sell agreement depending on several factors, including whether you want to keep your company very small and private, how long you expect your business to last, and whom you expect to succeed you when you die. When you’re creating a buy/sell agreement, allow plenty of time for discussions with your co-owners — talk, argue, and speculate about future possibilities.
If you leave the company or die, you or your survivors may be stuck with a small-business interest that no outsider wants to buy and for which no insider will give you a decent price.
It is easy to ignore this contingency planning, however it is not a question of if but of when. Planning for death, disability or retirement will not help the agency run any better today. However, good planning will allow the surviving family and remaining owners to work through the difficult period with a smoother transition. An agency owner that spends their life building a firm, needs to make sure that the firm does not dissolve or sell for pennies on the dollar when they are no longer active.