Why is a Buy-Sell Agreement the Most Important Document for a Business Owner?

One of the most important documents that a business-owner can have is a buy-sell agreement. It serves many important functions. One of the most important is to govern how the ownership interests in the business entity can be transferred upon a defined triggering event, such as an owner’s death, incapacitation, retirement, bankruptcy or divorce. Providing a roadmap for dealing with business disputes while all the parties are getting along can save everyone time, money and stress when difficulties arise.

The buy-sell agreement should provide business owners who are unable to resolve disputes on their own, a means for resolving their differences. It should also address exit strategies if the disputes cannot be adequately resolved, including an agreed upon method for valuing ownership interests. In effect, the agreement provides a way for you to avoid litigation while still resolving disputes.

The three types of buy-sell agreements are:

  • Redemption agreements. When an owner leaves the business, or attempts to sell their interest, the entity may purchase his/her interest.
  • Cross-purchase agreements. When an owner departs from the entity, the remaining owners may purchase the departing owner’s interest.
  • Hybrid agreement. True to its name, it is a combination of both types of agreements. The exiting owner’s interest is offered to the remaining owners to buy. If the remaining owners decide not to purchase it, then the entity may buy the exiting owner’s interest.

The buy-sell agreement may provide for maintaining life insurance to cover the cost of a buyout in the event of an owner’s death.

The buy-sell agreement can be a complex document and it requires strategic planning. There are many events that can give rise to exercising a purchase option among co-owners of a business. We can help you understand the tax consequences to each owner and to the entity. We can also work with you to create an agreement that will not only help ensure the successful operation of your business, but also provide exit strategy options to help avoid litigation in the future.

If you are interested in learning more about protecting your business with a buy-sell agreement, let us help. The Astill Law Office has provided high quality legal services for over 30 years. We specialize in wills, trusts, estate planning, and asset protection. If you have any questions about creating a Trust, Will, or estate planning in general, contact The Astill Law Office at 801-438-8698.