What are the basics of a buy-sell agreement?

On Behalf of | Jun 4, 2019 | Uncategorized | 0 comments

A buy-sell agreement, otherwise known as a buyout agreement, is a contract that dictates what is to become of all or part of a business should an owner no longer be able to participate in it. For this reason, you might also hear someone refer to a buy-sell agreement as a business estate plan. If you have not already done so, you should draw up and sign a buy-sell agreement for your Illinois business. Fundera explains why and how to go about doing so.

The most essential function of a buy-sell agreement is to guide the division of your business’s assets and ownership when a triggering event occurs. Your buyout agreement should detail what constitutes a triggering event, but most businesses list death, divorce and disability as qualifying events.

A tax accountant or business attorney should help you with the process of creating your agreement. However, it is helpful to have an idea of what the process entails before you and your partners enter discussions.

As with a prenup or a will, you want to draft the agreement early on in your business partnership. If you try to create one after you have already conducted substantial business, you or other partners might feel attacked by the suggestion of a need for a buyout agreement. A party may also become combative when discussions regarding valuation or triggering events take place.

Once you decide to create a buyout agreement, it is time to set up the ground rules. Ground rules include triggering events, how the business will be valuated and by whom and to whom the business may go in the event that a partner backs out or can no longer uphold his or her end of the business agreement.

Fundera also notes that it is not uncommon for business owners to take out life insurance policies against each other when they sign buyout agreements. These policies help to ensure partners have the funds to purchase a party’s shares when a triggering event arises.

Finally, Fundera warns you to pay attention to taxes. If you were to sell your business, estate taxes would claim a sizeable portion of the profits. The same holds true for any of your successors who receive a share of your business and then decide to sell it. Your valuation method should take into consideration probable taxes.

This content is for educational purposes only. You should not use it as legal advice.