Running a business of any size requires lots of attention to detail. It can be difficult to foresee all of the potential problems that may arise down the road for your company. However, there are a few relatively simple steps you can take right at the beginning of your business venture that can prevent or diminish potentially devastating outcomes in the long run – such as by executing a buy sell agreement with your business partners.
What a buy sell agreement does
A buy sell agreement (also known as a buyout agreement) can be a clause in a partnership agreement, or it can be a separately executed document. It is essentially an agreement between the co-owners of a company that governs what will happen to each owner’s interest in the company upon death or retirement.
For example, the agreement might stipulate that the company is bound to pay a certain amount directly to a deceased owner’s estate in compensation for the company absorbing that owner’s ownership interest in the company, instead of allowing the owner to bequest their ownership interest through their estate plan.
Situations in which a buy sell agreement can save your company
Buy sell agreements do not only control what happens to an owner’s interest when they die or retire. With a bit of effort, you can also structure your agreement to apply in the event that one of the owners gets a divorce.
The last thing you want is for your business partner’s disgruntled ex-spouse to petition the court to receive partial ownership of your company as their fair share of the marital property. You can prevent this by making a buy sell agreement that requires an owner to sell their ownership interest back to the company immediately upon or before divorce.
There is no silver bullet when it comes to planning for and avoiding inter-partner disputes. But by putting written agreements in place before conflicts arise, you can help to ensure that there is a clear protocol that you are all expected to follow and that can head off many disputes before they occur.