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What is a Buy-Sell Agreement and why do you need one?

A Buy-Sell Agreement is an agreement between the owners of a business that provides for when and how one owner can buy out the other’s interest. All businesses should have some form of a Buy-Sell Agreement. The reasons for this may not be obvious. The following are just a few scenarios of when one business partner wished she had a Buy-Sell Agreement:

  1. Your business partner dies and suddenly you are partners with your dead partner’s heirs
  2. Your business partner divorces and suddenly you are partners with your original business partner and his ex-wife
  3. Your business partner files a personal bankruptcy and suddenly you are partners with a bankruptcy trustee

A well written Buy-Sell Agreement will outline when a partner can (and in some cases must) sell his interest in the business. It will outline a valuation of the partner’s interest in the business and may even provide for a way to pay for it (such as insurance).

Not only does a Buy-Sell Agreement protect your business, but it may protect your family as well. If you predecease both your business partner and your spouse, your spouse may not be suited or interested in being involved in the business and may be better provided for with the cash value of your partnership interest. Additionally, there may be tax benefits under the new federal tax law for having a well-defined Buy-Sell Agreement.

Based on the value, you would think that all businesses would have Buy-Sell Agreements. According to Forbes, nearly 75 percent of businesses do not have such important documentation. The good news is that you are not limited as to when you create one. You can create a Buy-Sell Agreement regardless of how long you have owned your business. Once you have one, you can amend it at any time to address changes in the business or the business owners.

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