When two people in Denver partner to start a business, it is often with the anticipation that the enterprise will be lucrative for years. However, no matter how well the partners work together or how successful their business, life has a way of throwing a curve ball.
For example, one partner could get a divorce, or one partner could end up filing for personal bankruptcy or one partner could unexpectedly pass away. These, and other life events, could have a major impact on the running and ownership of the business that, absent the proper protections, the partners may never have intended.
One way that business partners can ensure that the ownership and running of the business stays in the hands of the people of their choice is by executing a buy-sell agreement. A buy-sell agreement can state who will have the ability to buy into the business, how they can do so, and it can address how possible situations such as divorce or death will be handled.
Buy-sell agreements work best if they are executed before they are needed. This way, it is more likely that all partners will agree to its terms. That being said, as a business grows and changes, it may be a good idea to review the buy-sell agreement to ensure it still meets the needs of the business. Also, planning ahead means the partners can address their interests objectively, rather than being clouded by any negative emotions.
Buy-sell agreements should also contain provisions regarding business valuation. In such provisions, rather than laying out a formula for valuing the business, it may be more helpful to provide in such clauses that an expert will determine how the business should be valued. In addition, buy-sell agreements should lay out who is allowed to be a buyer and if the business is to be sold, how it will be paid for. It is also important that any sale or buyback provisions are formulated in a way that will reduce the tax implications of the sale.
As this shows, there are good reasons to consider executing a buy-sell agreement during the business formation process. No one is guaranteed that the future will work out exactly as they have envisioned. Preparing for the inevitable ups-and-downs of life could help make such transitions run more smoothly for the business partners and could minimize any negative effects such situations could have on the business itself.
Source: Forbes, “6 Things To Know About Buy-Sell Agreements,” Mary Ellen Biery, Oct. 11, 2015