What is a Buy-Sell Agreement?

Posted by John Crow | Apr 02, 2020 | 0 Comments

The classic Christmas film It's a Wonderful Life presents a beautifully tragic depiction of the American struggle during the stock market crash at the end of the 1920s. In the movie, the protagonist, George Bailey, attempts to save his bank business from the greedy Mr. Potter. As the townspeople demand to withdraw their money, George criticizes the impersonal control of large corporations like what Mr. Potter represents. George begs the townspeople to recognize the importance of keeping local banks alive as he shouts: “Can't you understand what's happening here? Don't you see what's happening? Potter isn't selling. Potter's buying!”

The conflict between George Bailey and Mr. Potter delves into the messy realm of business ownership and the monetary value of a corporation. It's a Wonderful Life shows us how businesses often are bought and sold in times of crisis. In real life, the chaos depicted in this classic film can be avoided with thorough preemptive planning.

When it comes to succession planning, businesses need to be prepared for a “crisis moment” that could change the structure of the company. This happens when -

  • A business owner dies
  • One business partner wants to sell his/her share and leave the business
  • A business owner is deemed physically or mentally incapable of continuing his or her role in the company
  • An owner retires
  • Other unforeseen circumstances cause a business owner to sell his or her interest in the company

Whether you're the owner of a new business or of a mature company, the need for succession planning is the same. The future of your business is only as successful as the plan you have in place. One way to ensure the safety and success of your business is to create a buy-sell agreement, also called a buy-out agreement, for your business.

What is the purpose of succession planning?

Succession planning is essential for all businesses. The structure of a business determines the best approach business owners should take in preparing for the future. A buy-sell agreement is most beneficial for closely held businesses that involve family members, close friends, or other tight-knit groups. A change in a business's infrastructure can cause significant personal conflict when those changes have emotional effects. To prevent disputes between remaining owners, members, and partners, current business owners should have an established agreement that clearly outlines buy-out procedures.

What happens to business interests without a buy-sell agreement?

If the owner of a company dies and there is no succession plan such as a buy-sell agreement, the interest in that business passes to the beneficiaries or heirs of the member who died.

Why is a buy-sell agreement important?

When someone who holds interest in a company dies, the remaining owners often want to divide the business interest of the deceased owner among the remaining owners. The remaining owners may not want a new owner to come into the business. They may not trust the new owner, they may personally dislike them, or they may simply be fearful of any significant changes to the business. Such issues among the owners can destroy a business.

Having a buy-sell agreement in place provides security and peace of mind to the remaining owners that the business interests of the deceased owner will stay with the current owners. Such an agreement also guarantees that your beneficiaries will be taken care of by a cash payout of the interest of the business. 

What should your buy-sell agreement look like?

To ease the transition of a business buy-out, an established contract should include:

  • the sales price of the business interest
  • the method of payment, and
  • the terms of the payment.

The buy-sell agreement should be written in clear terms by an experienced attorney to ensure procedures will be followed correctly by all parties involved. Your attorney will draft the document to reflect the requirements listed above. Additionally, the agreement should clarify when the terms of the agreement should begin and a list of who can purchase the owner's shares in the company. Because the price of a company's shares fluctuates over time, the objective value of the business, allowing for inflation, should be cited in the document. If you foresee other complications specific to your business, such as disputes over who owns what proportion of the company or ongoing family conflict, explain the situation to your attorney. It's important for succession planning to consider all possible scenarios that may occur in the future.

Ready to plan for the future of your business? Contact Us!

Clarksville attorney John W. Crow has extensive experience working with local business owners to help their company thrive. To hear more about how succession planning can benefit your business, call our office at 931-218-7800 or set up an appointment online today.

About the Author

John Crow

John Crow is the founder of Crow Estate Planning and Probate, PLC, a boutique law firm located in Clarksville, Tennessee. He has extensive experience in guiding people through the important and often complex decisions surrounding wills, trusts, conservatorships, and business formations.

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