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3 questions to ask about buy-sell agreements

On Behalf of | Dec 21, 2022 | Contracts

If you own a business with one or more co-owners, you should have a buy-sell agreement in place. This is a contract between co-owners that sets the price at which each partner can sell interest in a company.

As with other contracts, a buy-sell agreement has to be precise and clear to be effective. Entrepreneur suggests some considerations you and your co-owners have to make while creating a buy-sell agreement.

1. What happens when you or a co-owner leaves the company?

When your business is new, you and your co-owners may have no intention of leaving. However, things change as time goes by. Eventually, you may wish to retire.

One of the most important purposes of a buy-sell agreement is to make a succession plan for when you or the other co-owners leave the company.

2. How will you value the business?

Before you or any of your co-owners can sell interest in the business, you need to know how much it is worth. You may think that this would be straightforward, but there are several different ways to value the business. How you make this assessment depends on the standards in your industry.

3. How will you fund an exit by an owner?

Another name for a buy-sell agreement is a buyout agreement. When a co-owner wants to leave your company, he or she could sell the interest to someone else, or you and the other owners could buy out the interest. This can put financial stress on your company unless you come up with a plan to fund it. For example, you could have the insurance company pay, set up installment payments, or transfer stock gradually.

A well-crafted buy-sell agreement can protect you and your company in the event of financial upheavals such as divorce or personal bankruptcy among your business partners.