What is a Buy-Sell Agreement?
A buy-sell agreement is an agreement between owners by which they decide how to deal with the “6 D’s” that can challenge a business. These “D’s” are death, disability, divorce, distress (financial, like bankruptcy), disputes (with your partners) and disengagement (e.g., retirement). For instance,
Death--the stock you own in your company is your personal property and, if you die, your wife or children or other heirs will receive it. Is this the best solution for your business and your co-owners or would your wife or children prefer to be bought out at the fair market value of the shares?
Divorce—as a marital asset, your divorcing spouse may have a claim on the ownership of your business, particularly where there is no pre-nuptial agreement. Just ask Amazon founder, Jeff Bezos, whose wife walked away from the marriage with billons in Amazon stock.
Disability—if you are an owner working actively in your business, and your co-owners depend upon your active efforts, your total disability can create problems for that business, particularly if that total disability is permanent.
Distress—if an owner files for personal bankruptcy, the owner’s shares in the company may become an asset under control of the bankruptcy court.
Disputes—People change. Sometimes a partner you have worked with in lockstep changes. Sometimes disputes arise and there is no other solution than to part ways. In that case, which partner buys out the other? At what price?
Disengagement—or, retirement. At some point, you might want to retire and let your co-owners continue the business. How does that work? What happens if your co-owners do not have the cash to buy out your interest?
The key to planning for these situations is to do so early.It is much easier to reach agreement when none of the 6 D’s are staring you in the face.When difficulties or challenges arise, it is nearly impossible to reach consensus on important ownership issues.
You can call Henry G. Grendell at 440-462-6503 for a free initial consultation to discuss your business succession plans.