When you start a business, creating a buy-sell agreement should be incorporated into it early in the company’s life cycle. Though buy-sell agreements can pertain to anything, especially when they are highly valuable assets, we will look at them through the lens of a new business owner. If you understand what they can do for the newly-minted business owner, you can easily apply it to your situation. An attorney can draft a buy-sell agreement that protects you and the asset itself.
Why The Need For Buy-Sell Agreements Exist
Imagine a scenario where you and a partner start a business to raise and sell sheep. (Our firm is in Texas—which happens to be a top producer of sheep.) Over the next decade, you and your partner build a relatively small but highly profitable business. What happens if your partner passes away unexpectedly? That question is fundamentally crucial because someone will inherit the deceased’s portion of the company. The surviving partner, you, may have a new partner who has an equal say and no experience raising or selling sheep.
To take this one step further, the person who inherited it gets contacted by your competitor who wants to buy half of your business.
Create The Transition Early
Why did the above scenario devolve so quickly? Because there was no clear transition. When your partner passed away, half of the business left you to go to someone else. This situation always existed by not having an attorney draft a buy-sell agreement. The passing of one of the partners just made it more visible.
Your partner could have decided to leave or sell their share of the business at any point. Buy-sell agreements protect you in these circumstances too. The agreement outlines who receives the company’s remaining shares if they decide to leave or retire. Even if the shares pass to the deceased’s family, the buy-sell agreement may force them to sell it to you—and this will be done at fair market value.
The buy-sell agreement wouldn’t be as valuable if the estate were forced to sell the deceased’s shares to you as long as you were willing to pay significantly more than it was worth.
Fraser, Wilson, & Bryan, P.C.
Buy-sell agreements are a cost-effective way of ensuring your business’s continuity and that the company’s shares go to the surviving partner. It is important to remember that to receive maximum protection, the buy-sell agreement must be drafted to reflect your specific interests. To speak to an attorney, contact Fraser, Wilson, & Bryan to schedule your free consultation today.
