Buy Sell Agreements For Small Business Owners
A buy sell agreement also known as a buyout agreement, is a contract detailing the course of action in case one of the partners in a business decides to quit. The departure could be as a result of many reasons such as retirement, selling shares, divorce, and bankruptcy, disagreement with other partners or death.
Drafting buy-sell agreements for small businesses can be quite difficult but it still is necessary as that is you money in question and you cannot just throw it away. Coming up with a buy-sell agreement is just like drafting a will. Actually sometimes the buy-sell agreement is referred to as a business will. Its purpose is to protect the company and to ensure important things are well taken care of in case one of the partners leaves the company.
You will need a buy-sell agreement for the following reasons;
Buy-sell agreements ensure the continuity of business through ensuring that members agree on the fate of the business before any trouble starts.
A buy-sell agreement lays out a succession plan for members who wish to leave the business. This will protect the members remaining from ownership conquests with remaining relatives of the departed owner especially if the departure was because of death. The buy-sell agreement will indicate a strategy much ahead of time that will be used by the remaining partners to resolve any disputes.
It will clear out any forms of uncertainty by indicating the events that might call for a buyout.
It gives protection to assets in your business and also protects liquidity through providing a financial plan for each of the various triggers addressed I the agreement.
It will protect the interests of the business entity and the interest of the business owners as well and by this it will ensure members work with great respect for each other.
Buy-Sell agreements normally contain the following:
They are structured in either of the following ways: cross-purchase or redemption
A cross-purchase buy-sell agreement is designed to allow remaining owners to buy out the shares of the owner that has departed.
A redemption layout design for also referred to as repurchase allows the business entity to reclaim the share interest of the departing partner.
Both a redemption buy-sell agreement and a cross-purchase have pros and cons. designing your buy sell agreement according to either of these largely depends on you. Both designs will however need you to address the succession plan, Events that trigger the buyout, sources of funds and also the cost of buyout.
The first thing you should ask yourself is who can buy the shares in case of departure of an owner. Losing some of your major staff can be a major blow to your business. It will not only affect how you manage the business but also it will have an impact on company sales. This problem can be handled easily but the next arising problem will be managing the newcomers in the business. Having a succession plan will ease your burden with regards to this issue.
Triggering events are events that might call for a buyout. These events need to be stated clearly and they are events that when they happen the shares will be advertised. Some of the reasons for buyouts could include death, divorce or death. A buy sell agreement should indicate how all these will be handled.
Where will the money come from to complete the buyout? Are the individual owners responsible for initiating the buyout or will the company be used as the funding source to buy out a departing co-owner? Insuring your business will reduce the trouble you go through since they will be in place to cover the expenses of funding a buyout when necessary.
Buyout evaluation is the process trying to evaluate the price of buy-outs. Based on the trigger of the buyout, there will be a fixed price for each. The terms of payment will also vary depending on the trigger. For instance if the buyout is because of death then it could be a whole full one-time payment funded by an insurance policy while retirement could be bit-by-bit payments over a period of time.