If you own a corporation and have one or more partners or shareholders, you need to strongly consider creating a buy/sell agreement. Though it is impossible to know what the future holds, you still have an opportunity to prepare for it. Think of buy/sell agreements as a tool to accomplish that.
When you and your partner draft a buy/sell agreement, you lay the groundwork for a transition if your partner passes away or chooses to leave the business. Consider the following scenario:
An Unwanted Partner
Imagine that you and your partner have an established and successful business. Unfortunately, your partner passes away unexpectedly. Because your partner owns a piece of the company, his share becomes part of his estate.
The next question is, who then receives his share in the company? The result is that you could be forced into a scenario where you have new business partners (the people who inherited his estate). There is nothing to guarantee that these people know your industry, possess any degree of business acumen, or have a genuine interest in seeing your business succeed.
The other option is that the heirs sell their shares to someone else, and you will play no part in this decision.
Benefits of a Buy/Sell Agreement
A buy-sell agreement prevents that scenario from happening because it states who is entitled to each person’s ownership in the corporation. Another element of a buy-sell agreement is that you can arrive at a reasonable price for the shares in the corporation.
That prevents someone from receiving a share of the company and demanding significantly more money than they are worth. It is important to remember that buy-sell agreements don’t only apply to people passing away. If your business relationship deteriorates, one person buying the other one out can become complicated. By previously establishing fair market value for the other’s portion of the business or guidelines for fairly determining that value, you can reduce the need for complex negotiations.
Should you and your partner part ways, the terms and conditions by which this will happen have already been outlined through your buy-sell agreement. Think of it as a prenuptial agreement, but it governs how a corporation will end instead of a marriage.
Corporations and LLCs
Buy-sell agreements are used for corporations, but members of LLCs need the protections of buy-sell agreements, too. In the LLC context, buy-sell agreements are usually called member control agreements or operating agreements. For all of the reasons above, multi-member LLCs need to have a clear member control agreement and/or operating agreement in place from the start of the business.
Consider creating a buy-sell agreement as soon as you establish your business. When you and your business partner operate without one, you put yourself at risk. Whether your business is still in the early stages, or if you have decided to create one, contact the legal professionals at Neve Webb.
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