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What should be addressed in a buy-sell agreement?

On Behalf of | Oct 15, 2021 | Business Formation & Planning

Business owners in the New York City area have a lot on their plates. Managing the day-to-day operations of their business is a full-time job. It can be easy to neglect some long-term concerns, such as considering what happens when you or a business partner want to leave the business. If a business does not have a plan in place, an exit can lead to problems. A buy-sell agreement is something businesses should have in place to prepare for these events.

A buy-sell agreement should include the following:

  • A valuation clause
  • Ground rules of the agreement
  • Any provision for heirs that help mitigate the tax burden

 A business owner will meet with their business partner, accountant and a valuation expert in order to create the agreement. They will focus on:

  • Starting early. A buy-sell agreement should be established as soon as possible. It can be less emotional and combative if this agreement is worked out before any other substantive business occurs.
  • Set up ground rules. The contract needs to be practical and realistic for your business which means spelling out which heirs will get the business, which events can trigger the company’s sale, etc.
  • Life insurance policies. Business partners should take out life insurance policies on each other when they sign buy-sell agreements. This will make sure their partner has enough money to buy out the deceased or disabled co-owner.
  • Valuation clause. A valuation clause is critical in how the value of the company will be calculated if a partner is no longer involved. Some businesses may use their own methodology to calculate this amount while others will prefer to use a valuation expert.

A legal professional who is skilled in business formation and planning can help a business owner draft a buy-sell agreement that works for the business owners, their partners and any heirs.