An agreement between the owners of a business as to what triggers a requirement to buy or sell their ownership interest can stand alone or be part of an agreement that sets out how the co-owners intend to manage and finance the business and their ownership interests.
If there is more than one owner in your business, having a buy sell agreement is a good idea. Regardless of the type of business, it's wise to consider the various 'what ifs' that come with having co-owners, and decide in advance how to handle them.
What do you typically see addressed in buy sell agreements? That depends on the circumstances, but will often cover the following types of issues, among others:
- What happens to a co-owner's interest in the business if he or she dies? Will the other co-owners buy out the deceased owner's interest or allow it to be transferred to any heir(s)?
- If the co-owners work for the business, what happens if they leave or retire?
- What happens if one wants to sell? Do the other co-owners have the first right to purchase that interest before it is offered to outsiders? Can a co-owner sell to a competitor?
- How will the buy-out price be determined and when will it be paid?
- Will the business take out life insurance on the co-owners to fund a buy-out?
- Do the co-owners want a way to trigger a sale by one to the other(s) if they no longer get along?
- If a majority want to sell, can they force all co-owners to sell?
Because they are meant to plan for the unpredictable, as well as the potential for a breakdown in relations between co-owners, it is always better to consider and prepare a buy sell agreement at the outset of a business or co-ownership relationship.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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