If you have business partners, planning for business continuity is essential to ensure that operations continue uninterrupted, should something unexpected happen to one of the partners. A business buy-sell agreement is one way to accomplish this imperative, especially if the company is closely held.
The reasons you should plan for such a contingency are logical and sound. However, if you have not implemented a continuity plan, negotiating the terms under which partners may exercise their rights to buy out one another can become a source of tension.
Using the services of an asset- and tax-planning lawyer can ease those tensions and help business partners achieve a meeting of the minds.
Why Businesses Need Buy-Sell Agreements in Place
Planning for unexpected events helps keep your business running smoothly, no matter what happens. Death or incapacitation of a partner is only one of the potential issues that could arise and derail your operations.
A contentious divorce could cause problems, especially if the spouse attempts to legally obtain a partner’s assets. Legal action against a partner could also put that individual’s ownership share at risk of outside interference. Personal creditors and even the IRS could introduce complications that put you and other partners legally and financially at risk.
With a buy-sell agreement in place, any such occurrences, known as triggering events, give the other partner(s) the right to buy out the beleaguered partner’s ownership interest. Consequently, the business is taken out of harm’s way, maintaining continuity.
Understanding Buy-Sell Agreements
Buy-sell agreements are essentially a type of legal contract that defines the terms under which one partner’s business interest can be — or must be — purchased by other partner(s).
In many cases, business owners struggle to determine how a given partner’s ownership share will be valued at the time a buyout becomes reality. Other key details that should be included are specifics about triggering events, how much (if any) input from heirs and designees will be involved and whether the buyout will be perfected by the remaining partners or by the entity itself.
Once the business owners have agreed on the terms of the contract, however, each partner must ensure that they have the financial capacity to fulfill their obligations, should a triggering event take place — often this can be accomplished with insurance or other financial products. Financial capacity of the partners is critical when more than two partners are involved.
Implementing Buy-Sell Agreements
If you do business with one or more partners who are actively involved in the daily operations and decision-making of the company, you need to have contingencies in place for unexpected events.
If you have not implemented a succession or business continuity plan, talking to a tax attorney is imperative. At Cantley Dietrich, we specialize in helping closely held business owners protect what they have worked so hard to build.
Our team provides assistance with income tax planning, complex estate planning and asset protection. Contact us today to learn more about buy-sell agreements, succession planning and business continuity.