Understanding Buy-Sell Agreements
July 18, 2022
A buy-sell agreement may sound like it’s a mechanism for buying and selling businesses, but that’s not exactly the case. A buy-sell agreement is an agreement forged between co-owners of a business to cover the departure of one owner because of retirement, divorce, bankruptcy, death, or just a simple desire to move on to a different pursuit.
Other terms for a buy-sell agreement include buyout agreement, business will, and business prenup. In other words, a buy-sell agreement protects the interests of both the departing employee (or their estate) and the remaining owners. Such arrangements prevent confusion, disarray, and the prospect of that co-owner’s share being sold to a third party that the other owners object to.
Even when a buy-sell agreement is in place, one or more of the co-owners might feel that a lawsuit is the best way to guarantee their interests are being fully taken care of. Even if no lawsuit has been filed, a co-owner or two may want to seek a legal opinion on what’s transpiring, putting the prospect of a lawsuit in plain sight.
If your business is facing the departure of one co-owner and you need to make sure your rights and investment are being properly protected, contact Engel Professional Association. We have more than two decades’ experience in helping businesses make smooth transitions when challenges arise. We will review your buy-sell agreement and advise you on implementing its provisions in everyone’s best interests. If there is already a legal action pending, we will represent your interests.
Engel Professional Association proudly serves clients in and around Minneapolis, Minnesota, as well as Woodbury, Maple Grove, St. Cloud, Mankato, and St. Paul.
What Is a Buy-Sell Agreement?
A buy-sell agreement, as mentioned briefly above, covers the possibility of one co-owner or partner leaving the business and how the other co-owners will address that departure, mainly in terms of buying out that person’s financial stake, either by the other owners or by the business entity itself. To do this, the agreement will also stipulate methods of valuation so that a fair market value can be ascertained and employed in the process.
There are basically two common forms of repurchasing the share of the business held by a department partner – a cross-sell agreement and a redemption agreement – though it is possible to combine the two.
In a cross-sell agreement, the other owners purchase the share of the departing owner, while in a redemption agreement, the business itself buys out the share available. When it comes to the death of a co-owner, life insurance policies are often used for both of these approaches. A combination of cross-sell and redemption agreements will see the co-owners or partners buying a portion of the open share, with the business itself purchasing the remainder.
Often, the other owners and the business itself may not even have enough cash on hand to make an outright purchase, so the buy-sell agreement can provide for flexible payment terms. For instance, the agreement might call for one-third down followed by installment payments made at an acceptable interest rate.
Complications in Buy-Sell Agreements
Even with a carefully spelled-out buy-sell agreement, when it comes time to begin the process, circumstances might present obstacles that complicate matters.
For instance, if a partner decides to get divorced, what role does the other spouse have? Can they demand that the divorcing spouse’s share be assumed by him or her, at least partially, or even demand that the share deriving from the divorce be sold to a third party? The buy-sell agreement can address this by prohibiting the sale of an owner’s interest to outside parties without the other owners’ consent.
What if one partner is facing bankruptcy? The result could be that the bankruptcy trustee might demand that the entire business be sold to satisfy the bankrupt partner’s debts. There needs to be a provision in the buy-sell agreement that the other co-owners can provide a lump sum (representing the bankrupt partner’s share) to the bankruptcy trustee, thereby averting a larger threat to the operation of the business.
There can also be fights over valuation, which is why a mechanism for valuing the business must be included in the buy-sell agreement.
Trusted & Experienced Business Attorney
If a buy-sell dispute is brewing, or the agreement itself needs to be invoked and successfully applied, and your business is in or around Minneapolis, contact Engel Professional Association.
We can not only help you craft ironclad buy-sell agreements but also help you implement them when necessary while fully respecting everyone’s rights and interests. If matters need to go to court, we will be there to represent you fully.
Call us at Engel Professional Association with all your business questions and needs. We have the knowledge, experience, and resources to help your business succeed.