What Is a Buy-Sell Agreement?

Most people have heard of Murphy’s Law, the old adage saying that “anything that can go wrong, will go wrong.” Of course, this law is applicable to just about every area of life, and business is no exception.

Since running a business can be a pretty precarious venture, it’s important to protect yourself from the things that can, and will, go wrong. One way to protect yourself is to draft a buy-sell agreement.

What Is a Buy-Sell Agreement?

A buy-sell agreement is a legally-binding contract that outlines a business succession plan or other exit strategies in the event of unforeseen events, like divorce, disability, or death. Buy-sell agreements will also let potential investors know who can buy into the business, how the succession process will work, and what alternatives to litigation will be available at that time.

Strangely, though, only one quarter or so of all business owners in the U.S. have one of these business succession plans. What’s more, more than half of all U.S. business owners are over the age of 50, meaning these businesses could be thrown into chaos upon the deaths of their owners and no succession plan to sort the aftermath.

Things to Consider When Drafting a Buy-Sell Agreement

 

  • When You Draft It

 

The general rule for drafting buy-sell agreements (among other types of business succession plans) is the earlier the better. It’s best to draft a buy-sell agreement while you and your business partners are all still alive and in possession of your mental faculties, as this will streamline the entire process. Moreover, the sooner you have one of these agreements in place, the sooner your business’ value is protected from that which can, and will, go wrong.

 

  • Business Valuation Clause

 

In a buy-sell agreement, a business valuation clause essentially states that the value of the business must be determined by a business valuation professional. Not only will you not have to worry about creating formulas for valuing your business, but the value of your business will fluctuate greatly as time goes on, which will inevitably render some of these formulas useless anyway. Only a trained professional will be able to accurately appraise your business.

 

  • Ground Rules

 

It never hurts to get the ground rules in writing so that there are no misunderstandings later on. It may also protect some parties from liability in certain events, depending on the nature and scope of your particular ground rules. Some business’ rules may include who will take over in the event of bankruptcy or death, how ownerships sales will be funded, and what will trigger the sale of the business itself.

There are a lot of factors to consider when drafting a buy-sell agreement, which is why it’s so important to work with a white collar criminal defense attorney who can help you avoid common pitfalls when creating a business succession plan. Our team at Cove Law, P.A. can do just that. Call us today at 954-921-1121 to learn more about how we can assist you.