A comprehensive Buy-Sell Agreement is one of the most important legal documents a business can have.
Although a good Operating Agreement is a very important document for an LLC because it sets out in a binding written agreement important rights and obligations of the owners, such as who the members are, the percentage of the Membership Interests in the LLC each member owns, how the LLC is controlled, whether a member is obligated to contribute money or property to the company, how to call meetings, and the procedures that must be followed for the members to approve company actions, a Buy-Sell Agreement is even more important. (For more information on Operating Agreements, read our article “Don't Lose Control of Your LLC”).
As we discussed in Business Succession Planning, it's critical that every business have a plan for the time when an owner will leave the business. The best way to address these issue and make a plan is through the use of a Buy-Sell Agreement.
A Buy-Sell Agreement is an agreement for the sale and purchase of a business. It is entered into between the business owner and the future purchaser of the business, and the ideal time for setting up the Buy-Sell Agreement is years, even decades, before it is needed. (Note on vocabulary: if you're entering into a contract for the sale of your business now, that's not a Buy-Sell Agreement. That's called a Purchase Agreement.)
A Buy-Sell Agreement can be used in a multi-owner business, such as a multi-member LLC, or in a business with only one owner. The issue is not how many owners there are, but how the sale of the business will be handled. A good, comprehensive Buy-Sell Agreement will address the following issues:
These are the events that will cause the Buy-Sell Agreement to be “activated,” triggering the purchase and sale of the business. Some examples of triggering events are:
- death of the owner – states who will be the next owner
- retirement of the owner – provides a way for a retiring owner to “cash out” of the business
- disability of the owner – if the owner is no longer able to provide required services
- disagreement among co-owners – to prevent a stalemate in the business
- bankruptcy of an owner – to prevent a share in the business from being transferred to a creditor
- termination of employment – especially useful with an owner who has only a minority share of the business.
The parties to the Buy-Sell can agree on the sale price in advance, either by (1) setting the price directly in the Buy-Sell, (2) by setting out a formula for determining the sale price (such as a multiple of the the average net profits for the previous 3 years), or (3) by agreeing to have the business appraised.
Terms of the Purchase
These provisions address, among other things, whether the seller will finance all or a portion of the Purchase Price.
If you have a business and want to discuss setting up a Buy-Sell Agreement, our attorneys will be happy to assist you. We can guide you through the issues, help you determine the appropriate Triggering Events in your situation, advise you on the opportunities and potential pitfalls in the various choices, and prepare the documents to protect you, your business and your loved ones. Call our office at 419-872-7670 to schedule an appointment to begin preparations on your Buy-Sell Agreement today.