Buy-Sell Agreement benefits
Do I need a Buy-Sell Agreement for my business?
If you own a business and have a partner and have not put a legally binding Buy-Sell Agreement together it is probably the most important document you need to accomplish as soon as you can. Hopefully you never need to put your Buy-Sell Agreement in motion but if you do, you want to execute what’s important to you and your partner so it saves time, money and provides the peace of mind it is supposed to provide.
Who needs a Buy-Sell Agreement?
The answer to this question is very simple – any business that has two or more partners. To put together an effective Buy-Sell Agreement consider three things. First, it requires all main parties to agree to it. That often takes time and discussion so make an agreement to start now. Secondly, where possible, try to formulate the Buy-Sell Agreement so that any loss is measurable and an insurance policy can cover any losses. Third, for the best Buy-Sell Agreement, put it together when emotions are low. Something I repeatedly see in business is that when emotions are high, clear thinking and intelligence are lower.
Buy-sell Agreement benefits
There are many situations when a Buy-Sell Agreement is a wise investment of time and energy. Perhaps the most obvious time is when starting a new business. Unfortunately, this seems the most obvious time but it can also be the most demanding. The main reason it is so difficult is that it seems there are too many other priorities that are more urgent and it is hard to get an agreement. In addition, a qualified attorney best puts a good Buy-Sell Agreement together so this means creating a framework and then scheduling time and incurring costs to make sure it is written correctly.
Starting a new business
Here is an example of not having a Buy-Sell Agreement meant the destruction of the business and a waste of just over two years work for one entrepreneur and his friend. In this case, Bill and his best friend Paul knew each other for over 14 years. Their kids play together all the time and about once every 3 months or so Bill and his wife go out to dinner with Paul and his partner and have a great night out.
Because of their friendship, when Bill said to Paul they should go into business together it seemed a great idea. Paul had a secure job in Corporate America and had put money aside while Bill had worked for 10 years and was ready for a change and to own and operate his own business; as he said “to do it the right way.” Bill didn’t have much money but he was willing to start the business if Paul could put in some money and get things started. The agreement was that once the business was up and running, Paul would leave his job and come and work with Bill.
So Paul put in $100,000 to start the business while Bill worked 60 + hours per week for 2 years to get the business established and by the 23rd month, profitable to the point that Paul was earning a market salary.
However, what Bill and Paul didn’t discuss was if and when Paul would get back his money. It’s now almost two years later and unfortunately for Paul, that job he had in Corporate America has been cut. Much to Bill’s surprise, Paul’s now asking when he can get back his $100,000 he invested in the business as he needs it to live off till he finds a job.
This came out of nowhere for Bill as he is explaining to Paul that he’s worked two years for 60+ hours per week and taken little to no salary. He explained to Paul that he thought the original investment was worth about the same as the money Paul would have earned if he was paid a fair salary for his skills and so they are about even. A simple Buy-Sell Agreement would have forced the discussion with Bill and Paul, as Paul’s now threatening legal action to get back his money but Bill says he does not have it.
Bringing in a new partner
In another situation that I was asked to assist, Sue and her business partner Graeme had their business up and running and doing very well. The business was established in 2004 and despite the recession of the last few years, was now rebuilding and doing exceptionally well. The business was doing so well that Sue liked the idea of continuing to grow the business by bringing in another partner, Grace. She discussed the idea casually with Graeme and he said he did not have too strong of an opinion but would give it some more thought. Sue misunderstood his comments as being fine with the idea and so she moved quickly and made Grace an offer which included equity or ownership interest in the partnership as Grace said she had received an offer from a competitor.
Business is about taking and minimizing risks as well as finding and maximizing opportunities. However, the Buy-Sell Agreement that Sue and Graeme had put together in 2005 when they thought their partnership would be successful had not been looked at since then. Some 6 years later the business had changed and become much more valuable but there was no agreement in place how to value the business at its current market rate or fair market value nor what terms should be offered to a new partner. The end result was that Graeme felt he was being pushed out as Sue moved so fast and more over he did not think the business was ready to bring on a new partner. Rather than say a straight out no to Sue when she first asked about bringing in another partner and would think about it, he really meant no but did not want to come straight out and say it. The tension of bringing in a new partner ended up being too much for the business with Sue and Graeme each hiring an attorney to resolve the matter.
If a business decides to bring in a new partner its critical to have a Buy-Sell Agreement that not only deals with a fair way to value the business going forward but also in case an existing partner decides to leave and how they will be paid when they leave.
One of the strategies to use when putting together the Buy-Sell Agreement is to try to get risks that an insurance policy will cover. For example, a good insurance policy will provide a pay out to the business if one of the partner dies. This money can be used to pay down a debt that could otherwise hurt the business due to the death of the partner and the income they were generating for the business. It obviously doesn’t replace the partner, but if it provides money that can stabilize the business, the remaining partner can continue to operate the business while they look for a replacement.
How do you put a Buy-Sell Agreement together?
A Buy-Sell Agreement is a legal document. Once all parties sign the document it is binding. Because it is such an important document, a qualified attorney is the best person to put it together for you as they can break things down and make sure it is clear to all parties. When you choose an attorney, make sure it is an attorney that specializes in that area of the law, for example, an attorney that deals with estate plans or business law including contracts.
A good Buy-Sell Agreement can be the best investment two business partners can make. Just like the seasons, a business is in constant motion and ever changing due to new technologies, laws, taxes, education, the stress and strains of the world and the economy and so it goes. The goal of a good Buy-Sell Agreement is that it will be ready to service the business regardless of the season the business finds itself in.
If you’d like more information, feel free to get in touch with me for a quick consultation. We’ll discuss your particular needs, what’s important to you and make a plan for those first few steps.