A buy-sell agreement allows you to pre-define what happens when you want or have to leave a business partnership. By making it well in advance, you can agree on terms that are fair to both sides. If you only make one when you need it, emotions and circumstances could get in the way.
When might you need a buy-sell agreement?
The 4Ds cover the four most common situations in which one of you may need to leave the partnership:
- Divorce: Depending on how you set up your business partnership and your marriage, there may be an overlap. You can use prenuptial agreements to ensure you keep the two separate. Otherwise, you might find your business partner’s spouse claiming a share of the business if they divorce.
- Death: Leaving your share in the business to your family may seem natural, but your business partner needs to be happy with this.
- Disability: One of you may become incapable of continuing to contribute to the company.
- Departure by request: One of you might wish to leave for personal reasons or due to a disagreement.
When creating a buy-sell agreement, consider if the other partner has the first refusal. While it may seem the polite option, be sure it does not prevent you from accepting a higher offer. Consider how they will pay. Not everyone has the cash on hand to buy their partner out on the spot. Work out in advance how you will value your company. Determine a system and stick to it.
Buy-sell agreements are one of the many contracts you need as a business owner. The better written any corporate contract is, the better it will serve you.
