SAFEGUARDS

New BusinessSAFEGUARDS

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    How to Establish Buy-Sell Agreements

    What will happen if one of your business partners decides to retire early, has an accident and can’t work, or just decides to sell? Will you suddenly be running the company with a spouse, a stranger—or even a competitor? Suppose your partner passes away unexpectedly; his or her part of the business could be tied up in probate for six months to a year or more.

    These nightmare scenarios do happen, which is why experts recommend creating a Buy-Sell Agreement for any business that has more than one owner. The agreement will spell out what will happen if an owner exits the business—for any reason.

    For example, what happens to the departing owner’s interest? Will the remaining owner or owners buy that stake? Perhaps there’s a mutually agreed upon person who will step up. Or, the owners may want to put restrictions on sales to outside parties without unanimous consent. Then, there’s the purchase price. How will the business be valued—and how will it be paid for?

    Buy-Sell Agreements can be a separate document or they can be included in an LLC’s operating agreement or an S corporation’s articles of incorporation.

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    Consider life insurance policies. They’re often a key part of this strategy to keep your business running smoothly in the event of a partner’s death. The company purchases a policy for each of the owners, with death benefits equal to the estimated value of their interest in the business. Then, if one of the owners passes away, the others will have the cash on hand to buy back that share.