Role of Buy-Sell Agreements in Businesses
Many people don’t realize the necessity of a buy-sell agreement until they are faced with a critical situation. Business owners have a buy-sell agreement or buyout agreement between the co-owners of the business. It is a legal agreement to save the situation during emergencies. The agreement serves its purpose in cases where a co-owner resigns or dies, or a financial crisis occurs. As per the contract, the remaining co-owners will buy the shares of the deceased co-owner or the one who left.
Every buy-sell agreement has a valuation section to detail how the owner’s shares will be valued when a co-owner leaves. If this section is absent from the agreement, it will take a lot of time and money to decide the value of the interest when the time comes.
Benefits of having a Buy-Sell Agreement
- The employees, customers, and creditors of the business are not affected and the business continues.
- The heirs can be assured that the shares have buyers.
- The transfer of management and ownership of the business is done in a smooth way.
- The remaining owners are relieved that the interest does not go to someone who does not deserve it, such as a third party.
- The heirs get enough money to pay the taxes and debts.
- The purchase price is known which makes it easier for the heirs to plan for the future.
- It is easy to get credit from lenders or banks if they can be sure that the business is secure.
What Are Types of Buy-Sell Agreements?
Generally, there are three types of buy-sell agreements:
Cross-Purchase Agreement: In this type, the remaining owners will buy the shares of the person who left at a pre-decided price. For this, every co-owner is required to have sufficient money to buy the share. The agreement defines the terms that will be followed and when the purchase will be made if the need arises.
Redemption or Entity Purchase Agreement: In this case, it is the company that buys the deceased (or the exited) person’s shares. Each owner will have an insurance policy and the company will have the capital to buy the person’s share. It is the responsibility of the company to take care of the capital to buy the shares. This could be arranging money from a third party, ready cash, purchase of life insurance, etc.
Hybrid Agreement: The hybrid agreement is a combination of the two above mentioned agreements. According to this agreement, both the company and the remaining owners will purchase the shares of the person who exited. This is a flexible agreement where the co-owners are not obliged to purchase the shares. If they are not willing, then the company will do the purchase.
Contact an Experienced Florida Business Attorney Today
A business person would always think about protecting the business before anything else. So, if you don’t have a buy-sell agreement in place, take out time to make one. It will not only secure you but also the people associated with the business. If you have questions about buy-sell agreements or other aspects of your business, contact Tampa business transaction & formation attorney David Toback law office today to schedule a consultation.