The Buy-Sell Agreement: How it Can Literally Save Your Business

As a business owner myself, I can attest to the amount of work, struggle, anxiety, exhaustion and blood-sweat-tears required to keep a business afloat. Why would I look the other way when it comes to a single document that could inevitably help preserve that very same business? I wouldn’t, and neither should you.

That “single document” is the buy-sell agreement. A buy-sell agreement (BSA) is simply an agreement between or among the owners of a business (or between the owners of the business and the entity itself) to purchase/sell interests of the business at a specified price once a “triggering event” occurs.

The basic purpose of a BSA is really that simple. A BSA protects business owners in advance of a triggering event, such as death, divorce or withdrawal of an owner, by defining the terms of when and how an owner can leave a business, thereby preventing unwanted third parties from acquiring an ownership interest in the business. It should also spell out what will happen to an owner’s interest in the event of that owner’s death, disability, or inability to operate as an owner, while providing a method of funding the buy-out of a withdrawing (or deceased) owner’s interest, as well as the terms of payment.

Before You Hit the Highway…

Here’s an example: Two brothers, both married with children, own a retail establishment in the metro area. Neither of their spouses knows a thing about operating the business. Let’s say Owner 1 is the behind-the-scenes manager, handling taxes, purchases, land/real estate, etc., while Owner 2 runs the operation day-to-day.

Owner 2 sees one-too-many reruns of the 1969 classic film “Easy Rider,” and arrives at work one day and announces to Owner 1 that he’s “tuning in, turning on and dropping out” of the business. He wants out–he’s bought a Harley and is going cross-country to “really live, for once.” He’s not only exiting the business, but he’s divorcing his wife, too. “She can take over for me,” says Owner 2. “Let ‘er have it all,” he announces, securing his bandana around his forehead and adjusting his fringe-leather vest.

Horrified, Owner 1 realizes that had the owners prepared a BSA ahead of this event, the agreement would have spelled out that such a “voluntary transfer” of ownership in the business was either prohibited, or, if permitted, would only allow Owner 2′s interest to be transferred/sold to Owner 1, to begin with. In addition, had they executed a BSA, the owners would have agreed in advance as to the payment terms. With Owner 2 now “on the road,” it might be virtually impossible to iron out a payment plan now.

Alternatively, these two owners could have specified that upon withdrawal of Owner 2, the business must be sold to a third party entirely, given the difference in each owner’s respective roles, or duties, in running the business. At any rate, just about any other mutually agreeable solution other than “Wife 2″ taking over would have been preferable. Now, Owner 1–who has never run the business day-to-day, is faced with the costs of replacing Owner 2′s labor and expertise, as well as fighting off Wife 2 in a costly legal battle.

You can see how a simple agreement can literally salvage a business by either allowing the remaining owner/s to maintain control of ownership, or, by mandating that the business at least be sold to a bona fide purchaser with a reasonable offer, the BSA thereby enables owners to at least receive adequate compensation upon exiting the venture.

Simple, but Not Easy

BSAs are indeed simple in terms of their purpose. They are not, however, “easy” or simple to draft, nor is there a “one size fits all” commonality among BSAs. These agreements are binding, and their power can be used both ways: They can serve the parties to the agreement wonderfully, or, drafted incorrectly or imprecisely, they can end up hurting more than they help.

If you own a closely held business that has two or more owners, you may need to explore whether or not a BSA would be appropriate for you and your entity. If you are unsure, consider the following questions:

  • Do you and your partner/s have an agreement in place describing how the business should be sold/divided/handled if an owner leaves? (whether voluntarily or involuntarily)
  • Would you be comfortable having your co-owner’s spouse as a potential business partner?
  • Do you have in writing how the respective business interests of each owner should be valued in the event of a sale or distribution of an owner’s interest?
  • Have the owners agreed on a way to fund the buy-out of an owner upon his/her death or withdrawal?

As with anything relating to your business and legal rights, consult with an attorney (as well as your tax advisor) to get more information and to decide whether a BSA is right for you and your business. And it may be wise to monitor your partners’ late-night TV viewing habits, as well….;p

Note: This article is meant for information only, and should not be construed to be providing legal advice. This article is not legal advice. Consult an attorney if you need or want actual legal advice specific to your unique situation.