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Shareholders' Buy-Sell Agreements

You and your partner have made plans for your new business venture. You have agreed on who will be responsible for different aspects of the business and have agreed on how much each will invest in the business. The future looks bright, but have you considered what happens when you breakup?

Most entrepreneurs in this situation forget one of the most important parts of business planning ... and that is to provide for a breakup of the business. What should be done in the event of the death, disability, or retirement of a partner? What should be done in the event of a breakup of the partnership? How much is each person's interest worth?

No one wants to engage in this type of discussion. In the startup stage, it is felt that the cost of having such an agreement prepared is cost-prohibitive, particularly when all of the owners' resources are needed to finance the startup of the business. Later in the business's development, it is like getting someone to write a will. Everyone knows that they should have one, but it is put off until it's too late.

There are many reasons to have a buy-sell agreement. Frequently, banks require one as a precondition to a business loan in order to provide for continuity of ownership in the event of the death or disability of a key person. Divorce of a principal could have a dramatic impact on the business, as well as the disability or death of a principal.

The buy-sell agreement could be triggered by a number of events. Frequently, these include death, divorce, retirement or disability. The idea is to give the remaining owners the right to continue the business without interruption and without having a spouse (or ex-spouse) become an owner in the business.

The buy-sell agreement could also provide who would have the right to buy the stock or interest of the departing owner, as well as the price and the manner of payment.

One of the most difficult, yet most important part of the agreement, is the manner in which the business is to be valued. Frequently, it is difficult to get parties to agree on the mechanics of valuation of a business while they in engaged in a strained relationship, but a properly worded buy-sell agreement can expedite the process and eliminate a lot of the potential hostility that arises when business owners quarrel. The buy-sell should provide how the business is to be valued to help minimize disputes. The buy-sell can also provide that the owners sit down once a year and determine the value of the business so that if something happens to trigger the buy-sell agreement, that value would be used for the buyout price.

Frequently, life insurance is used to fund the buyout price. If any one owner dies, the insurance can be used by the other owner or the business to buy the share of the business owned by the deceased principal.

A properly drafted and enforceable buy-sell agreement is essential for the smooth and orderly transition of ownership in the event of a tragedy, dispute or retirement. It helps avoid the possibility that the business be sold at an inopportune time.

An experienced attorney can help draft a buy-sell agreement that gives the proper consideration to protect your largest investment. The law firm of Bellas & Wachowski Attorneys at Law has the experience and expertise to deal with your particular issues.