A buy-sell agreement is sometimes more aptly referred to as a buyout agreement. These agreements are binding legal contracts between business co-owners that dictate when owners can sell their interest in the business as well as who is permitted to buy an owner’s business interest and the price for that particular share of the business interest. These agreements are entered into by the owners of a business in order to establish some boundaries for what will happen to an owner's share of the business upon the happening of a specified event, such as the death or disability of an owner. Buy-sell agreements can provide much-needed stability throughout some major events happening among business owners. Do you need a buy-sell agreement for your business? Below we will discuss some things to consider in making this decision.
Do I Need a Buy-Sell Agreement?
When determining whether you need a buy-sell agreement, it can be important to consider how many things can jeopardize business ownership interests. For instance, what if one of the co-owners of your business goes through a divorce. Did you know that the soon-to-be former spouse may request part ownership in your business? Texas is a community property state. That means that all earnings acquired during the marriage as well as all property purchased with those earnings will be deemed community property owned in equal parts by the spouses. In the event of divorce, each spouse may stake a claim to their portion of the community property, business interests included. With a buy-sell agreement in place, you can protect your business from this type of claim by a spouse incident to divorce. The agreement itself can contain a provision requiring the former spouse of an owner to sell any interest he or she received in a divorce settlement back to the company and co-owners. The agreement can also specify a valuation method for this sale.
A buy-sell agreement can also shield a business from financial difficulties that a co-owner may be in the throws of. For instance, should a co-owner file for personal bankruptcy, such a filing could jeopardize a business. While it may be an extreme scenario, it is possible that a bankruptcy trustee could sell off all the assets of the business and take the bankrupt owner’s share of the proceeds to pay off that co-owner’s debts. A buy-sell agreement, however, can require co-owners to notify the other co-owners prior to filing for bankruptcy. The notice would turn into an offer to sell the co-owner’s interest to the other owners prior to filing for bankruptcy. The money would then, in turn, be handed over to the bankruptcy and the need to liquidate the business assets would be neutralized.
As you can see, having a buy-sell agreement in place for a business can help avoid some significant missteps. Such an agreement can also be helpful specifically for family business owners that plan on passing their business interests to children or other relatives. With a buy-sell agreement, you can work to keep estate tax costs lower by dictating a more conservative price for your business interests.
Business Law Attorney
Do you have more questions about buy-sell agreements? The Kumar Law Firm has answers for you and can help draft a buy-sell agreement that helps meet and protect the goals you have for your business. Contact us today.