A buy-sell agreement or buyout agreement governs the situation where one partner leaves the business. Sometimes called “business wills,” these agreements permit you to plan for the death, disability or other departure of your partners. Especially in closely-held corporations or family businesses, discussing and papering these contentious business succession issues early creates certainty during more challenging times -- such as the untimely death of a partner. A well-crafted buy-sell agreement can serve the interests of both remaining and departing partners: remaining partners retain control and departing partners can sell what might have been an unmarketable asset. Priori can connect you with a corporate lawyer with experience drafting buy-sell agreements and working with closely-held or family corporations.
If you do decide to implement a buy-sell agreement, here are a few of the decisions you and your partners will need to make.
Triggering events. You will need to define when the agreement is triggered. Examples of triggering events might include: death or disability of a partner, voluntary or involuntary departure of a partner, bankruptcy, divorce (usually in the case of a family business) or retirement.
Mandatory vs. Optional. A mandatory buy-sell agreement will require the business or your partners to purchase your share; an optional buy-sell agreement will commonly give a ‘right of first refusal’ to your partners, the business or third-parties (such as surviving spouses to by the shares).
Insured buy-sell agreement. If you decide to go with a mandatory buy-sell agreement (or in some cases, an optional one), you may also want to consider setting up life insurance policies for the partners, naming either the remaining partners or business (depending on the agreement’s structure) as beneficiaries to finance the acquisition.
Who. A buy-sell agreement will obligate your partners to buy your stake (cross-purchase agreement), the business itself (redemption agreement) or a hybrid. A lawyer can help you determine which of these options makes the most sense for your situation, but if you do go with a cross-purchase agreement, you’ll want to define which partners have the right to purchase in what amounts, as it could shift control of the business.
How Price is Determined. In the agreement, you’ll want to set a methodology to determine price. A word to the wise -- a prefixed price is almost never a good idea! A lawyer can advise you on the different options, so you can determine one that is sensible for your business and plans.
Because buy-sell agreements often need to be executed during difficult times, it may be recommended to include a provision that would retain the services of a corporate trustee should the triggering events occur.
Drafting a buy-sell agreement with a lawyer early pays dividends, and will allow your business to run smoothly and with certainty if a partner departs.
Depending on your situation, plans and the number of partners, the cost of drafting a buy-sell agreement can vary. When you hire a lawyer in the Priori network, drafting a buy-sell agreement typically costs anywhere from $1000-$5000. In order to get a better sense of cost for your particular situation, put in a request to schedule a complimentary consultation and receive a free price quote from one of our lawyers.
Frequently Asked Questions
How should I decide between a mandatory agreement and one with a right of first refusal?
A lawyer can help you understand which is right for your particular situation, but here are some common considerations to bear in mind. If you go a non-mandatory route, you might wind up in a situation where (1) a deceased partner’s heirs have a non-marketable asset (which the surviving partner could then, theoretically, buy at a significantly reduced price); or (2) you could wind up in business with a stranger or someone undesirable. On the other hand, if you implement a mandatory plan, you could wind up with an expensive obligation (if you fail to fund it) or one where your heirs are locked into a financial arrangement you agreed to many years before.
Priori Worksheets & Checklists
Complete Priori's buy-sell agreement checklist prior to your consultation with a lawyer to make your first meeting more productive and efficient.