Even the steadiest of businesses go through partnership changes during normal times, often due to death, retirement, divorce, bankruptcy, or leaving to pursue other interests. But these are not normal times, which means that partnerships are shifting at a much higher rate. Business owners can, however, plan for these changes by drafting buy-sell agreements which are also known as a buyout agreement or a business prenup. The contract outlines how the change will happen.
While these can be drafted as needed, the documents are often included in the business plan when the partnership begins or is structured. Having it in the drawer provides peace of mind, knowing that the business is prepared when that inevitable change occurs.
What is a buy-sell agreement?
It is an agreement between all partners in the business that addresses future ownership and partnership changes. It is designed as a binding contract that addresses several important considerations. These include:
- Whether the partner is bought out by the others when she or he leaves
- The amount of ownership interest the partner has when they leave
- Who can buy the departing partner’s ownership interest (outside partner or pre-existing ones)
- Events that initiate the buyout
It avoids unnecessary uncertainty
Even when the buy-sell agreement sits in a file, it is still a written reminder to all the partners of what happens when there is a change. It can help inform their decision in leaving. It can also avoid unnecessary, costly and time-consuming disputes among remaining partners or force partners to dissolve a viable business. It also can provide a previously agreed-upon formula for valuing the departing partner’s interest, which otherwise could lead to contentious disputes between former allies. Finally, it can outline who can buy into the business, thereby avoiding the potential of an unwanted partnership.
It never hurts to plan
Some plans in life never come to fruition, and no plan considers every possibility. Nevertheless, buy-sell agreements are a good start. They can be as straightforward or as complicated as the business itself but provide peace of mind to some partners, if not all of them.