Business partnerships are typically built on trust and shared goals, but unforeseen events can disrupt harmony. Buy-sell agreements are a strategic tool designed to address these uncertainties, providing a roadmap for buying or selling business interests under specific circumstances. In this guide, we define the concept and identify key triggering factors for activating buy-sell agreements.

Understanding Buy-Sell Agreements

A buy-sell agreement, also known as a business continuity agreement, is a legally binding contract that outlines what will happen if owners encounter certain triggering events. These agreements are common in businesses with multiple owners, providing a structured approach to guide transitions.

Common triggering events include:

• Owner’s Death: If an owner passes away, a buy-sell agreement can facilitate the smooth transfer of ownership. The agreement typically stipulates that the deceased owner’s shares are sold to surviving owners or the business itself.
• Owner’s Disability: If an owner becomes disabled and unable to actively participate in the business, this can trigger a buy-sell agreement. It outlines the terms for purchasing the disabled owner’s equity.
• Retirement: Retirement triggers are common in buy-sell agreements, providing a structured exit plan for owners looking to retire. The agreement outlines the process and terms for selling the retiring owner’s equity.
• Divorce or Bankruptcy: A buy-sell agreement can address situations where an owner undergoes divorce or bankruptcy. The agreement can specify the fate of business interests in such cases.
• Voluntary Sale: In some instances, an owner may voluntarily decide to sell their shares. A buy-sell agreement can define the process and terms for such transactions.

Benefits of Buy-Sell Agreements

As a strategic tool for businesses, buy-sell agreements offer a structured approach to guide transitions. This important framework brings certainty, financial security, and continuity to business operations. Key benefits include:

• Certainty and Clarity: Providing a clear roadmap for business transitions, reducing ambiguity and potential disputes.
• Financial Security: Ensuring fair valuation and financing mechanisms for acquisitions, protecting the financial interests of departing and remaining owners.
• Maintaining Business Continuity: Helping maintain stability and continuity by addressing potential interruptions caused by unforeseen events.

Key Considerations for Buy-Sell Agreements

Buy-sell agreements are crucial for shaping the business transition process. To achieve a seamless process, critical considerations must be carefully thought out in these agreements. Consider the following:

• Valuation Methodology: Clearly outline the methods used to determine the value of business interests, whether through appraisal, earnings multiples, or other agreed-upon methods.
• Financing Mechanisms: Specify how funds will be provided for acquisitions, whether through life insurance, installment payments, or other financial arrangements.
• Triggering Events: Clearly define the events that activate the buy-sell agreement to avoid disputes or misunderstandings.

Proactively Planning Business Succession

Buy/sell agreements can be an effective strategy to ensure smooth succession planning. They help address various scenarios and facilitate a smooth transition during periods of change. However, developing customized buy-sell agreements requires specialized expertise and thoughtful consideration.