Owners of small businesses have to prepare for the worst as well as the inevitable. Ultimately, every owner will pass away. But they may also become incapacitated or choose to leave the company. Far too many owners fail to consider what to do after something unexpected or catastrophic occurs. That’s where the buy-sell agreement comes in. If you’re a business co-owner, it’s essential to understand the role these agreements play in handling major life changes. The attorneys of Rosenbaum & Taylor can help with this critical governing document.
Buy-sell agreements allow businesses to adequately prepare for the death, disability, or other departure of a partner. These agreements also govern employees in a business who own shares (also called shareholders of the business). When someone leaves the business, something must happen with the share that he or she owns.
Without a buy-sell agreement, the shareholder retains their interest after they leave. If the person dies, it goes to his or her beneficiaries or according to intestacy law. Spouses can also claim these shares in divorce and creditors can claim them in bankruptcy. Because it would be highly disruptive to bring a stranger into the business arrangement, buy-sell agreements are strongly recommended.
The buy-sell agreement spells out procedures that allow the remaining business owners to purchase the departing member’s interest. This keeps business operations from being interrupted and allows the departing member to be fairly compensated.
New York law does not require the owners of a business to enter into a buy-sell agreement. However, failing to adopt one can spell trouble. The departed member may not be able to participate in the management of the company. Or a new owner who enters the picture could make it difficult to run the business. Any buy-sell agreement must be tailor-made for the actual business in question. But in general, these are some of the terms to consider including:
Triggering events. These are the events that will invoke the terms of the buy-sell agreement. They include an owner’s death, disability, incapacity, or leaving the company. Agreements also typically include terms addressing divorce, bankruptcy, and retirement.
What happens to the interest? Some buy-sell agreements have terms that require the remaining owners to buy the share. Others give a right of first refusal to the remaining owners, to the business, or to third parties.
Valuation of the interest. There should be agreed-upon provisions that determine how the value of the departing member’s share will be determined. There are multiple options for doing this. Setting a price as opposed to a pricing methodology is not recommended since the value of the business may change.
Funding the buyout. The agreement should explain how exactly the buyout will be paid. Some methods include installment plans, a sinking fund, or the use of insurance. Your lawyer can explain the options and help you and your partners make the best choice.
Buy-sell agreements can be formed at any point, even as standalone agreements. But it is best to include them in a shareholder’s agreement (for a corporation) or an operating agreement (LLC). Although these agreements can be complicated, an experienced New York business attorney can walk you through the process.
Anticipate Life Changes With A Buy-Sell Agreement
Without a buy-sell agreement, your business is vulnerable to sudden and serious life changes. Few want to think about the fact that other owners will eventually leave the company. When they do, you and your business need to be prepared. Talk to the experienced team at Rosenbaum & Taylor about a buy-sell agreement. We can explain which type of agreement is best and help secure the future of your organization. Call us today to schedule your consultation.