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How may I protect my business interest with a buy-sell agreement?

On Behalf of | Feb 16, 2022 | Business Formation

Partners in a new business may wish to consider ways to protect their stakes if one of them decides to leave. A buy-sell agreement defines how a partner could exit your business without its remaining partners dissolving the enterprise. As reported by Business.com, an agreement may include terms for acquiring a departing partner’s ownership stakes.

Contracts may outline events that trigger a buy-sell event. If a partner files for bankruptcy, for example, assets may liquidate to pay personal debts. An unforeseen death may also trigger a buy-sell event. You may wish to avoid a deceased partner’s heirs inheriting an ownership stake in your business.

Negotiating terms of a buy-sell agreement

Buy-and-sell arrangements generally offer three methods for preserving each partner’s interests. If your ownership structure consists of corporate stocks or partnership units, you may negotiate a plan for their redemption. Your business buys a departing partner’s shares as described in your agreement.

With the cross-purchase method, remaining partners buy a departing partner’s shares. Your buy-sell agreement may include terms on how much each partner could buy. A contract may also include a combination of redemption and cross-purchase methods. Based on discussions with your partners, you could create a clause that reflects each party’s needs.

Purchasing ownership stakes from a partner

Your buy-sell agreement could include terms outlining payment plans to acquire a partner’s shares. You may wish to add conditions regarding a down payment for an installment loan. Some business owners protect themselves from the loss of a partner by purchasing life insurance policies. If a partner dies, for example, you may use the proceeds to exercise your rights under a buy-sell agreement.

New partnerships may require planning to remain in operation after a partner leaves. A buy-sell agreement could offer agreed-upon terms to protect each partner’s ownership and also keep the business going.