Preparing for the Unexpected With Buy-Sell Agreements
An important part of running any successful business is taking steps to plan for the future. While business partners may enter a business endeavor planning to stay for the long haul, life may bring about unexpected events that result in the departure of one or more business partners. Preparing a well-crafted buy-sell agreement can protect business partners during unexpected events such as a sudden death or departure. Buy-Sell agreements provide a clear protocol to ensure business continuity during these otherwise uncertain times. The following information outlines the purpose of buy-sell agreements, the different agreement types businesses may enter, and why it is in the best interest of business partners to consult a Florida attorney with buyout experience to draft the buy-sell agreement.
What is a buy-sell agreement?
A buy-sell agreement is a legally binding contract that outlines how a partner’s share of a business may be reassigned if that partner passes away or otherwise leaves the business. These types of agreements are sometimes referred to as “business wills” or buyout agreements. The buy-sell agreement establishes under what conditions, to whom and at what price an owner, partner or shareholder can or must sell a business interest. In the case of a deceased partner of the business, buy-sell agreements establish the responsibilities of the decedent’s estate thus playing a role in that person’s estate planning.
A buy-sell agreement will also outline triggering events, or events that push the terms of the agreement into action. Examples of triggering events might include the death or disability of a partner, voluntary or involuntary departure of a partner, bankruptcy or retirement. Partners will define the conditions of the buy-sell agreement and the subsequent triggering events that would enact the buy-sell agreement.
Types of buy-sell agreements
Depending on the wishes of partners and the type of business entity in question, the terms and nature of any given buy-sell agreement may vary. Because there can be so much variability, it is in the best interest of business partners to consult a buyout agreement attorney who can discuss all options and help determine which type would best benefit their specific set of conditions. There are three main types of buy-sell agreements: cross-purchase agreements, redemption agreements and hybrid agreements.
In a cross-purchase agreement, the remaining owners or shareholders will purchase the deceased or departed owner’s interest. This type of agreement often relies on a life insurance policy that allows the co-owners to buy out the shares in the event of a death. A cross-purchase agreement is typically used in business continuation planning to assure business entity continuity. The document outlines how the shares can be divided or purchased by the remaining partners, such as proportional distribution according to each partner’s stake and role in the company.
Redemption agreements outline that the company itself will buy back the departing or deceased owner’s shares. Similar to cross-purchase agreements, the company will typically have a life insurance policy for each owner and use the insurance benefit to buy back the deceased owner’s shares.
Hybrid agreements are a combination of the two previous buy-sell agreements, requiring the remaining owners and business entity itself to purchase the shares of the departed owner. This type of agreement will outline the proportions of how much the remaining owners will purchase and how much the business will buyback.
Buy-Sell agreements provide a clear protocol to ensure business continuity during these otherwise uncertain times.
The importance of consulting an experienced business lawyer
Buy-sell agreements are complicated documents that require a clear understanding of the benefits and drawbacks of each type of agreement and how the agreement will impact the future of the company. In addition, it is often in the best interest of each partner to take out life insurance policies that will provide necessary payout to purchase the deceased partner’s shares. Buyout agreement attorneys will walk business partners through the necessary steps of crafting a buy-sell agreement that protects the interests of all the parties involved. A well structured buy-sell agreement puts in place a protocol that can keep the business operating successfully in uncertain times.
Call South Florida Law
Are you a business owner or corporate partner looking to establish a clear and thorough buy-sell agreement? Take proactive measures and consult an experienced buyout agreement lawyer from South Florida Law. The team at South Florida Law will ensure your business is set up for continued success when faced with an unexpected death or departure. Reach out to South Florida Law at (945) 900-8885 or via our contact form.