Why a Buy-Sell Agreement Is Essential for Your Business

AdobeStock_445476294-300x200When entrepreneurs are starting a business involving a partner or multiple partners, a buy-sell agreement will be a must-have because the agreement will establish protections for every party and the company if something happens or an exit event occurs with any of the business partners. Without this agreement, several variables may emerge, including a family member or other party taking ownership or a controlling stake without any concern for business success.

Formulating a buy-sell agreement can be a big demand, but you can get competent legal help in formulating this agreement. A Los Angeles business attorney with Structure Law Group, LLP can help you craft a buy-sell agreement that will focus on protecting your business for the long run.

When You Need a Buy-Sell Agreement

A business that does not have a buy-sell agreement could result in a former partner’s spouse becoming a co-owner, a bank gaining a stake in the company, or an old partner’s children becoming the newest members of a management team. All of these people who do not know about the business or even care about its survival will get a seat at the table, regardless of how much you might like it.

What follows are four other reasons to have a Los Angeles corporate law attorney set up a buy-sell agreement for your business as soon as possible.

Establishing a Fair Value Price for Shares

A buy-sell agreement will establish the fair value of a person’s share in the business, which could be important should a partner want to remain with the company after another partner leaves. A buy-sell agreement will help avoid disagreements about whether buyout offers are fair since the agreement will establish the figures in advance.

Develop an Exit Plan for Partners

The breakup of any partnership can be complicated. Former partners may not agree on the terms of a split when the terms are not clearly articulated. A buy-sell agreement will spell out the specific terms and conditions that partners must abide by should one partner no longer be with the company.

Keep Business Interests With Surviving Owners

Not having a buy-sell agreement in place means running the risk of having to welcome unexpected or unwanted business partners. A buy-sell agreement will stipulate who gets a share of a business when one partner is no longer able to be a part of it or plans to sell their share. Without an agreement in place, a partner’s next of kin could take over part of the company, and you could face significant disruption or possibly even the dissolution of the company should an heir decide to sell.

Create a Business Continuity Plan

An unexpected death, illness, or sale of a portion of the company can cause chaos for a business, so a continuity or contingency plan will guard against some of the obstacles such challenges could create. You will know who is responsible for what and how the business can carry on despite any such conditions.

How to Set Up a Buy-Sell Agreement

Make sure to work with a Los Angeles business attorney to help craft an effective buy-sell agreement that covers all of the basic ground that needs coverage. What follows are the five areas you need to cover.

Begin Early

You want to create your buy-sell agreement as early as possible. While you can certainly create an agreement later on, it is usually better to get it out of the way at the very beginning. The chances are good that the process will be far less combative or emotional when you take care of these details before any business occurs. It is also beneficial if the buy-sell agreement is just one of many contracts, documents, and other forms people need to sign before beginning business operations.

Create Ground Rules

A buy-sell agreement has to be a contract that is both practical and realistic for a particular business. A company valuation will be important, but so will be naming the heirs you want to receive part of the business. A buy-sell agreement may also list specific events that can trigger a company’s sale and prevent lenders from taking control because of a partner’s bankruptcy.

Take Out Life Insurance Policies

Many business partners will take out life insurance policies against one another when signing buy-sell agreements because it helps make sure that other parties have access to the necessary money for buying out a deceased or disabled co-owner. You want to be certain that you will have the cash on hand to buy out a former partner, and life insurance policies provide the means to make such a transaction.

Include a Valuation Clause

A buy-sell agreement’s valuation clause will be important because it will determine how you calculate the value of your stake in the company if you are no longer involved. Some businesses may prefer to use their own valuation methodology, but other companies may stipulate that a valuation expert will make such decisions.

Pay Attention to Taxes

Estate taxes will take a huge chunk of the money that a person gets for selling a business. This also holds true for any successors who sell shares they receive from you. Make sure you have an honest and conservative valuation formula within your buy-sell agreement to free yourself from unnecessary taxes as part of a sale.

Call Us Today to Schedule a Consultation With a Los Angeles Business Attorney

Do you need help creating a buy-sell agreement? Do not wait to contact Structure Law Group, LLP for help formulating a plan.

Our firm understands the kinds of concerns you will want to address and can ensure that you get a buy-sell agreement in which you can believe. Call (408) 441-7500 in Silicon Valley or (310) 818-7500 in Los Angeles, or contact us online to schedule an initial consultation that will allow us to take a closer look at your case and answer all of your legal questions.