Buy-sell agreements are an important yet often overlooked business document. Simply put: If your business has more than one owner, you should have one. Your buy-sell agreement doesn’t have to be complex; even a simple one will suffice!
What is a buy-sell agreement?
A buy-sell agreement serves as an arrangement among your shareholders or partners that provides for the purchase of one another’s’ shares in specific circumstances. You can adopt one during the initial organization of your business or institute one down the road. That said, it’s best to institute one before a sale is imminent, so you can all agree to a fair valuation method.
Here are a few reasons why you should have a buy-sell agreement for your business.
Facilitate the orderly transfer of shares
Buy-sell agreements provide for an orderly transfer of shares to ensure continuation of the business and reduce the risk of loss of value of the business or shares.
Especially in closely held businesses, buy-sell agreements allow for the orderly transfer of shares upon death, retirement, or disability of a shareholder. In a family corporation, a buy-sell agreement can be written to prevent outsiders from acquiring stock. Also, a buy-sell agreement can be written as a method for resolving disputes between shareholders.
Protect active shareholders
A buy-sell agreement often prevents a conflict between the active shareholders who may want to build the business and inactive shareholders which may wish to receive maximum current income. The agreement can preserve the relative ratios of ownership. This is accomplished by a guaranteeing to current shareholders the first right to purchase shares offered for sale.
Protect minority shareholders
Buy-sell agreements can also protect minority shareholders from being locked into a non-income-producing or non-salable investment. The buy-sell agreement provides a method or market for the sale of shares, since closely held business shares are not easily sold.
Set your business up for success.
A buy-sell agreement is a must if your business has multiple shareholders or partners. In our next post, we’ll discuss key elements of these arrangements. If you have questions about how to initiate a buy-sell agreement in your business, we can help you consider tax implications and more.
To learn more, contact us today.