If you own a business with one or more partners, it’s important to have a buy-sell agreement in place. This legal document outlines what will happen if one of the partners dies, becomes disabled, or decides to leave the business. A buy-sell agreement can help ensure a smooth transition and protect the interests of all parties involved.
Here’s a step-by-step guide on how to set up a buy-sell agreement:
1. Determine the type of buy-sell agreement you need
There are two main types of buy-sell agreements: cross-purchase and entity purchase. In a cross-purchase agreement, each partner agrees to buy the other partner’s share of the business if a triggering event occurs. In an entity purchase agreement, the business itself agrees to buy the departing partner’s share.
2. Determine the triggering events
The triggering events are the events that can trigger the buyout of a partner’s share. These usually include death, disability, retirement, bankruptcy, divorce, or voluntary departure from the business.
3. Determine the valuation method
It’s important to determine how the business will be valued in the event of a buyout. You can use a formula based on earnings or assets, or you can hire an independent appraiser to determine the value of the business.
4. Determine funding options
Once the value of the business is determined, you need to decide how the buyout will be funded. This can be done through cash reserves, loans, or insurance policies.
5. Draft the agreement
Once all of the details are determined, it’s time to draft the agreement. This should be done with the help of an attorney who specializes in business law. The agreement should be signed by all partners and kept in a safe place.
6. Review and update regularly
It’s important to review and update the buy-sell agreement regularly to ensure it still reflects the needs of the business and its partners. This should be done at least once every few years or whenever there are significant changes to the business.
In conclusion, setting up a buy-sell agreement can be a complex process, but it’s an important step in protecting your business and its partners. With the help of an experienced attorney, you can create a buy-sell agreement that meets the specific needs of your business.