Understanding Buy-Sell Agreements
When you’re starting a business, chances are that you don’t want to think about a possible future in which you or one of your co-owners leave the company, become incapacitated, or pass away. However, planning early for any of these future possibilities by creating a buy-sell agreement can secure your business, your finances, and your peace of mind. A business attorney can assist you in creating the plan, working closely with you to create terms that fit the unique situations of both you and your business partners.
If you’re considering creating a legally binding buy-sell agreement in Kansas, contact us at Coppaken Law Firm in Overland Park. Our attorney Jeff Coppaken is ready to help you and your business partners craft a buy-sell agreement that will allow you to move forward with confidence and minimize disputes in the future.
What Is a Buy-Sell Agreement?
A buy-sell agreement is a contract between business co-owners that details exactly how each owner’s share in the business will be passed on when they leave the business, become incapacitated, or die. Buy-sell agreements can be utilized by entities such as corporations, partnerships, and limited liability companies (LLCs).
Typically, the agreement will outline how the departing partner’s business interest will be sold back to another owner or owners (in a “cross-purchase agreement”) or to the company (in a “redemption” or “entity-purchase agreement”), although an agreement can specify that the business interest may be sold to another owner.
The agreement will specify who has the right to buy out the departing owner’s interest in the business; for example, you can dictate that no outside investors should be allowed to buy out a deceased owner.
Disputes When a Buy-Sell Agreement Does Not Exist
It is always wise to create a buy-sell agreement as soon as possible after starting your business. Certain events can negatively affect your business’s future if they occur before a buy-sell agreement has been drawn up. These events include:
Death of a Shareholder/Shareholder Becomes Incapacitated
If a shareholder in a business dies or becomes incapacitated without a buy-sell agreement having taken place, that shareholder’s next of kin may be eligible to take over the deceased’s share of the company. This can be devastating to the business or cause the business to have to cease operations if the heir decides to sell or if the heir does not share the same priorities or goals as the other owners.
Divorce of a Shareholder
If a shareholder is going through a divorce, there is a chance that their ex-spouse might gain interest in the company as part of the divorce settlement, which can cause the same issues as in the above scenario if there has been no buy-sell agreement.
Owner Files for Bankruptcy
If there is no buy-sell agreement and an owner files for bankruptcy or a secured creditor claims the owner’s share, then you could face the prospect of the bank or creditor interfering with the business’s ability to operate.
How to Minimize Disputes in a Buy-Sell Agreement
It is important to meet as early as possible with your business partners to craft an agreement that will benefit everyone while protecting the interests of the company. A business law attorney will be able to work with you to help you reach this goal.
You should agree on what circumstances will trigger a buyout, and include the above scenarios. You should also specify that an owner must give notice before they take certain steps such as filing for divorce or declaring bankruptcy so that the other owners can initiate a buyout. This will limit disputes arising over ownership of the company’s shares. Of course, death or incapacitation often cannot be planned for in advance, but many business partners fund future buyouts of a deceased partner’s business interests by taking out life insurance policies against each other when they sign the buy-sell agreement.
You should also agree on the valuation of each owner’s share. Usually, it’s best to state that you will base share values off of the company’s value. (Your attorney will be able to advise you further on the specifics.) Agreeing on a valuation ahead of time can help you avoid disputes over valuation further down the line.
Consult a Business Attorney
Having an attorney will help you to accomplish all of this, and can support you every step of the way as you draft your legally enforceable buy-sell agreement.
For assistance with drafting your buy-sell agreement in Kansas, call us at Coppaken Law Firm, serving Overland Park, Kansas, and other areas of Johnson County as well as Jackson County. Our attorney Jeff Coppaken brings not only his legal experience but his decade of business experience to every client meeting and is ready to advise on how to secure the future of your business. Call us today for a consultation.