When forming a business entity, whether it is a partnership, a limited liability company or a corporation, it is always good to have a contingency plan in place. Planning for the unexpected, like when a partner leaves the company or falls ill, is crucial for keeping the business viable.
This is why businesses that are not sole proprietorships include a buy-sell agreement during the formation of the entity. A well-written buy-sell agreement will keep the business running smoothly in the event that a partner or owner leaves.
For the New York City business owner or entrepreneur wishing to have a solid foundation for the business, it is important to have a skilled business law attorney to review or draw up important documents to ensure that the business is on the right track.
What the buy-sell agreement covers
A buy-sell, or buyout, agreement does not cover the purchase of sale of the company. Instead, it is a contract between shareholders. Whether it is a small closely held company or a larger entity, the buyout agreement limits a shareholder’s actions regarding the sale or transfer of shares if he leaves the company. This protects the business and the other shareholders from any complications if another shareholder departs.
A good buy-sell agreement should include:
- If the company will buyout the shareholder
- Who may buyout the shareholder’s stock
- How to measure the value of the shareholder’s interest
- Payout terms
The agreement prevents an unwanted buyer from obtaining an interest in the company, and also outlines how the shareholder can dispose of their ownership interest.
Events that trigger a buyout
A good buyout agreement identifies the events will initiate a buyout:
- personal bankruptcy
- death or retirement
- divorce
- disability
- termination of employment
Funding the buyout
A buyout agreement will stipulate how the company will handle the buyout. Companies sometimes pay for a buyout by directly using assets of the company and paying the balance back with income earned over time. More often, however, they are funded with life insurance policies.
Buy-sell agreements are usually included in the articles of incorporation or the by-laws, but they can also be stand-alone documents.