Before you start a business, you must write and discuss a lot of legal paperwork with your business partners. A buy-sell agreement is one of these documents. No matter the size of your business, this type of agreement can prevent financial issues in the future. A Phoenix corporate law attorney can help you craft a buy-sell agreement to ensure it is legally binding. This agreement will ensure your business runs smoothly should a partner leave.
Understanding How Buy-Sell Agreements Work
A buy-sell agreement is a legal contract between several business partners that spells out what will occur to ownership interests when certain circumstances arise. Such circumstances can include major life-changing events such as divorce, death, disability, or retirement. Also, the agreement could apply if a partner exits the business. A buy-sell agreement prevents disputes or conflicts between partners, ensuring the business continues to operate regardless of the circumstances.
Important Considerations Before Drafting a Buy-Sell Agreement
Consulting with a business lawyer is necessary before business partners draft a buy-sell agreement. They need to discuss the following with their attorney:
- Payment schedule. Business partners must discuss whether the buy-out is for a series of payments or a one-time cash payment. Also, factors such as possible interest rates, the possibility of the buyer to prepay the loan, and any loan security must be tackled.
- Insurance. If a life event triggers an exchange of business shares that requires a cash buyout, finding sufficient cash to fund the partners’ buyout can be challenging. In this case, business partners must discuss buying an insurance policy to ensure there are available funds for the buyout.
- Objectives. All parties must be on the same page when it comes to the business objectives.
- Taxes. All business partners must understand all tax consequences when business shares are exchanged later.
- Scenarios. Business partners must discuss all scenarios to ensure they have the right clauses in the agreement that would protect them against unexpected life events.
Things to Keep in Mind When Drafting a Buy-Sell Agreement
When drafting a buy-sell agreement, you and your partners must keep the following in mind:
- Determining the events that prompt a buyout. Major life changes like retirement, disability, death, and divorce trigger buy-sell commitments. This can also happen when a partner does not meet their obligations as stipulated in the contract. The agreement must outline the consequences of such events, ensuring the purchase of the seller’s shares.
- Discussing buyout clauses. Your lawyer will discuss common buyout clauses and recommend relevant ones. Such clauses include a wait-and-see, shotgun clause, drag-along provision, and tag-along provision. The attorney can explain these clauses in detail, helping business partners understand what they are getting into.
- Picking the right share buyer. If a certain shareholder is important to the operation of the business, the buyer of the shares should be able to fill this role within the business.
- Set a purchase price. Written procedures can ensure price disputes are settled quickly. Some options include agreeing yearly to predetermined purchase prices or to abide by an appraiser-established price.
- Adopting balanced buyout terms. When drafting a buy-sell agreement, discuss buyout periods, reasonable interest rates, terms about low cash flow, down payment amounts, and security guarantees. Clear objectives are necessary in such situations.
- Choosing the right structure. After the shares have been sold, no one will deal with expensive tax bills. Talk to your attorney about the corporate structure that suits your organization and helps you avoid tax surprises.
Drafting a buy-sell agreement can include tough conversations and complicated situations. However, by doing the work before you start a business, your business and partners are secured. A skilled business attorney can provide you with the right guidance to make an agreement that can effectively protect your new business.
