Advantages of a Buy-Sell Agreement For Business Partners
A buy-sell agreement is an essential part on any business arrangement where partners are involved. This is a relatively simple business document for many businesses, although the degree of detail may be quite involved in a complex partnership that possesses a wide array of assets. Because nothing lasts forever, a buy-sell agreement provides the tool for dissolving a relationship and serves to protect all parties involved. A buy-sell agreement simply outlines the methodology to be used to terminate the partnership arrangement. It generally prohibits one partner from selling their portion of the company without approval from the other partner or partners and provides the framework for any potential sale or buy out from a partner or partners.
Any number of events could trigger a desire to sell. Death, disability, divorce, retirement, loss of interest or simply a desire to move on with another phase of life are among the multitude of reasons in addition to any conflict that may arise between partners. A buy-sell agreement has a number of advantages.
1. It legally defines the partnership arrangement and establishes a methodology to be used to establish the worth of a business as well as the partner's share. It is critical to define how a share value is to be determined.
2. It protects the financial and business interests of each partner.
3. It adds stability to a relationship by removing any doubt about the process to be followed in dissolving that relationship.
4. It serves to answer any questions that may arise from lenders as a result of purchases, loans or other commitments entered into by the partnership.
5. It acts to strengthen a financial statement or business plan because it indicates that the partners have thoroughly thought through the business arrangement and have analyzed and prepared for any unforeseen future events.
6. It provides the basis for assessing how much life or disability insurance on a critical member of the company might be necessary to insure the company survives in the event that a partner dies or becomes disabled.
7. It establishes the worth of a partners share should it become necessary for that share to be purchased by a party not included in the original partnership.
The terms and conditions of a buy-sell agreement should be discussed freely and openly among partners before a partnership is formed. This can serve as the basis of a strong bond or may provide pause for concern about the partnership if difficulties are encountered in agreeing to the principals that may be outlined in the document. It is prudent to have a lawyer examine the document as well as an accountant to insure that no obvious legal flaws or disadvantageous tax implications are present.
In summary, a sound, well planned and forward looking buy-sell agreement has numerous advantages and will serve as a strong foundation for a partnership that will be able to survive should difficulties be encountered.
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