If you own a business with a partner, you need to be prepared for everything, including the possibility of a conflict that could force you or your partner to leave the company, as well as a partner’s retirement, disability, or death. In order to protect yourself, your business, and your employees, a buy-sell agreement should be created to eliminate any uncertainty as to how the business will be managed if a partner leaves.
Understanding a Buy-Sell Agreement
A buy-sell agreement is a legally binding contract that sets out the terms of how business partners will manage their ownership if one of them leaves, either voluntarily or involuntarily. The agreement may be a part of the company’s partnership agreement, operating agreement, or a separate written agreement. The buy sell agreement allows partners to resolve disputes by creating an exit for a dissatisfied partner. In addition, retiring, disabled, or deceased partners will have the option to liquidate their interest to provide income to themselves or their estate.
In general, these agreements give one partner the right to force the other to buy his interest, or to sell their interest, on specified terms. The agreement may specify who has the “right of first refusal” to buy a partner’s interest. In addition, the agreement will determine how the business will be owned and operated following a partner’s departure. A properly drafted buy-sell agreement can help to ensure the continuity and longevity of your business, while also avoiding potentially disastrous losses that can result if a business must be dissolved due to a partner’s unexpected departure.
Key Elements of a Buy-Sell Agreement
A buy-sell agreement must have a list of clearly stated buyout conditions that may trigger the sale of a partner’s ownership, which can include death, retirement, bankruptcy, and disability. The agreement should also include details about how much partners can borrow against their interest and what type of assets they can use as collateral.
Further, the buy-sell agreement should specify how partners will resolve business disputes, such as arbitration agreements. Finally, the agreement should outline how the remaining partners will divide or redistribute the ownership interest of the departing partner and how they will handle related taxes.
When preparing a buy-sell agreement in Illinois, you must consider the structure of your business; in other words, what type of entity it is (partnership, limited liability company, corporation, etc.) and how its ownership is divided. In addition, you must determine what valuation will be used for a buyout, such as current market value, current value of assets, or book value.
Arnett Law Group
At Arnett Law Group, we recognize the importance of protecting small businesses and relationships between partners. To ensure maximum protection, it is important that you have a well-drafted buy-sell agreement, as well as the advice and assistance of an experienced business law attorney found at www.arnettlawgroup.com.