Preparing a Buy-Sell Agreement for Your Small or Family-Owned Business

For business owners, a buy-sell agreement governs the situation where one partner leaves the business. These agreements permit you to plan for the death, disability, or other departure of your partners. Especially in closely-held corporations or family businesses, discussing and planning for these contentious business succession issues early creates certainty during challenging times--such as the untimely death of a partner. A well-crafted buy-sell agreement can serve the interests of both remaining and departing partners: remaining partners retain control and departing partners can sell what might have been an unmarketable asset. We have experience drafting buy-sell agreements and working with closely-held or family corporations.

If you do decide to implement a buy-sell agreement, here are a few of the decisions you and your partners will need to make.

TRIGGERING EVENTS. You will need to define when the agreement is triggered. Examples of triggering events might include: death or disability of a partner, voluntary or involuntary departure of a partner, bankruptcy, divorce (usually in the case of a family business), or retirement.

MANDATORY VS. OPTIONAL. A mandatory buy-sell agreement will require the business or your partners to purchase your share; an optional buy-sell agreement will commonly give a ‘right of first refusal’ to your partners, the business or third-parties (such as surviving spouses to buy the shares).

INSURED BUY-SELL AGREEMENT. If you decide to go with a mandatory buy-sell agreement (or in some cases, an optional one), you may also want to consider setting up life insurance policies for the partners, naming either the remaining partners or the business (depending on the agreement’s structure) as beneficiaries to finance the acquisition.

WHO. A buy-sell agreement will obligate your partners to buy your stake (cross-purchase agreement), the business itself (redemption agreement), or a hybrid. We can help you determine which of these options makes the most sense for your situation, but if you do go with a cross-purchase agreement, you’ll want to define which partners have the right to purchase in what amounts, as it could shift control of the business.

HOW PRICE IS DETERMINED. In the agreement, you’ll want to set a methodology to determine price. A word to the wise--a prefixed price is almost never a good idea. We can advise you on the different options, so you can determine one that is sensible for your business and plans.

Because buy-sell agreements often need to be executed during difficult times, we might recommend including a provision that would retain the services of a corporate trustee should the triggering events occur.

Drafting a buy-sell agreement with an experienced lawyer early pays dividends, and will allow your business to run smoothly and with certainty if a partner departs. If you have questions about preparing a buy-sell agreement for your small business, give us a call at 253.858.5434 to see how we can be of service. We proudly represent clients throughout Washington and Idaho and are available to meet in person, by phone, or via Skype or FaceTime.