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Shareholders' Buy-Sell Agreements

A buy-sell agreement, also known as a buyout agreement, is often overlooked by business partners in the beginning of their business relationship. This document, however, is as crucial to a business as the articles of the incorporation. Despite of what the name suggests, this agreement does not have anything to do with mergers or acquisitions. A buy-sell agreement is a legally binding agreement used to reallocate a share of a business if an owner dies or leaves the business. Sometimes referred to as a "business will" or a "business prenup", buy-sell agreements are used by sole proprietorships, partnerships. Limited Liability Companies (“LLC”) and closed corporations to divide the business share or interest of a proprietor, partner or shareholder. Simply put, a buy-sell agreement governs what happens to the business when one of the partners decides to exit. The experienced Chicago business lawyers of Bellas & Wachowski address some of the frequently asked questions related to buy-sell agreements below.

What is a buy-sell agreement?

A buy-sell agreement allows entrepreneurs to decide up front who can buy into the business or how a partner may exit a business, and how the process will work. A well drafted buy-sell agreement acts as a roadmap for the ownership successor plan in case of unforeseen circumstances. It will help protect business owners in cases of divorce or personal bankruptcy of one of the partners. In addition, it will act as a business continuity tool in cases of a sudden death or disability of a partner. It will also spell out the steps business owners can take when one of them decides to retire or bring in new partners.

Why are buy-sell agreements important?

Buy-sell agreements help business owners to avoid potential arguments, maintain value in the company, provide an exit, and ensure that no one unjustly benefits from the circumstances. It provides opportunities for business owners to discuss all possible scenarios before they come up, rather than forcing them into potentially expensive litigation down the road. It takes the negative emotions out of business dealings and allows the partners to focus solely on the ways to protect themselves and the company.

When should a buy-sell agreement be created?

The time to create a buy-sell agreement is well before it is needed, ideally at the inception of the formal business relationship. Every day that value is added to a business without a plan for future transition increases the owners' financial risk. Keep in mind, however, that the needs of a business evolve over time, warranting a review and revisions to the agreement from time to time.

What to know before creating a buy-sell agreement?

In order to determine a buyout plan, the owners need to know the value of the business. Moreover, since that value will change as the business grows, it is important to re-evaluate the business on regular basis. Involving an independent advisor to estimate the value or provide insight into the company every couple of years can reassure owners that they are on the right track. Additionally, this practice will assure third parties, including investors and creditors, that someone without a vested interest has reviewed the plan and the value of the company. If, however, you decide to determine the value the company on your own, it is essential to at least agree on the method of the valuation beforehand, as different methods may produce different results, leading to potential conflict down the road.

What should buy-sell agreements include?

In addition to establishing the value of the company, a buy-sell agreement will determine who can or cannot be a buyer, and how a business sale will be funded. For example, the owners may only want to allow family members to buy out ownership and control decisions. Outlining how a sale of ownership is to be funded (cash, debt, insurance proceeds, etc.) will help ensure proper debt and liability planning. In addition, a buy-sell agreement should describe what may trigger the sale of the company. This clause will help to avoid having to pass the control of the business to creditors in the event of the bankruptcy of one of the owners.

What are the tax implications of buy-sell agreements?

A solid buy-sell agreement may structure the sale or the buyback by the company in such ways as to minimize the taxes or to allow them to be paid over time. This comes in handy when an owner plans to sell his or her shares of the company to fund his or her retirement, for instance. In addition, buy-sell agreements have been used to successfully lower estate taxes in intergenerational businesses. This can help a family business owner to pass the business to his heirs without burdening them with unnecessary estate taxes caused by an aggressive value of the business.

I am ready to get a buy-sell agreement. What are my next steps?

An experienced Chicago business lawyer can help draft a buy-sell agreement that gives the proper considerations needed to protect your largest investment. The Chicago business lawyers of Bellas & Wachowski Attorneys at Law have the experience and expertise to deal with your particular question or concern. Call Senior Partner George Bellas to discuss your unique questions.

Bellas and Wachowski
Attorneys at Law
15 North Northwest Highway
Park Ridge, Illinois 60068
847.823.9030 x219
The In-House Counsel for Small Businesses™