Buy-Sell Agreement Attorneys

What are the Benefits of a Buy-Sell Agreement and Why Do You Need One?

If you have one or more business partners, you may want to include a buy-sell agreement or buyout agreement in your partnership agreement. Think of a buy-sell agreement as a prenuptial agreement for your partnership.

A buy-sell agreement captures in writing what will happen if one of the owners:

  • leaves;
  • retires;
  • becomes inactive;
  • files for bankruptcy;
  • must be bought out;
  • wants to bring in another owner; or
  • any other number of conditions that may affect the health of the business as conditions between owners change.

Buy-Sell Agreements Establish the Value of your Business

Company valuation is important should one owner need to exit the partnership as disagreements over valuation can lead to litigation. Head this off by agreeing on a valuation method prior to entering the partnership or before a dispute arises.

Because there are various ways to determine the value of a company, including push-pull provisions, having a method agreed upon before it is needed prevents disputes. Otherwise, each owner may naturally push for the method most favorable to them. Because every business is unique, with unique mixtures of assets and income sources, having a valuation method that fits your business will ensure that everyone gets a fair deal when the time comes to buy or sell all or a share of the business.

How Should a Business be Valued?

There are multiple business valuation methods and no “one” business valuation method is prevailing. Our business attorneys can explain the options and help you and your partners decide on the best method for your business based on its operations, assets, and income flow. Your partnership agreement can even specify the valuation services company that will perform an appraisal should the need arise.

Buy-Sell Agreements Set Ownership Limitations

There may be scenarios where you want to limit who can become an owner of the business. In the case of retirement, death, bankruptcy, or divorce of one of the owners, a spouse or estate may be entitled to a share of the business. A buy-sell agreement can establish rules that require beneficiaries to sell back ownership shares to the remaining partners unless approved as owners. This ensures that owners never end up with a business partner they don't want and is another example of when establishing a fair valuation method in advance can prevent future disputes.

The agreement may also put other limitations on ownership. For example, an owner may be required to sell his or her shares if they retire and no longer actively participate in the business. Alternatively, the owner may be allowed to keep their shares, but be required to give up voting rights on business matters. It may specifically exclude certain individuals or entities from owning an interest in the business. The specifics of each agreement will depend on the individual owners and their relationships.

Buy-Sell Agreements Guide Partners on How to Buyout the Other

The agreement should have in place some plan to fund the sale of an interest in the business. If a buyout is necessary, where does the money come from? Is the business required to have a life insurance policy for each of the owners? Will some of the profits be set aside in a sinking fund to ensure that the remaining owners have cash on hand to buy out the departing owner? Does the payment have to be lump-sum, or can it be split over a number of payments?

Working through these decisions in advance makes the process much smoother when the need for a buyout arises.

Similarly, if the business receives a purchase offer, owners will want to have in place an agreed-upon set of rules. Perhaps a large company has offered to buy the business out. Do you require approval from all owners or only a majority of them? How is the majority defined? A properly written buy-sell agreement will put in place a defined set of terms for what happens when any or all of the business shares are up for sale.

The attorneys at Hendershot Cowart P.C. have been drafting and reviewing agreements for Texas businesses since 1987. Please contact us today to find out how we can help you set up a buy-sell agreement for your business.

Buy-Sell Agreement FAQs

Does my Business Partnership Need a Buy-Sell Agreement?

All businesses that have more than one owner should have a buy-sell agreement in place.

How Does Divorce Affect a Business Partnership?

In a community property state like Texas, spouses may receive a portion of the business in a divorce. A properly drafted agreement will determine whether the spouse will be allowed to maintain that interest, or whether they must sell it back to the business.

How Does Bankruptcy of an Owner Affect a Business Partnership?

Like divorce, the bankruptcy of one of the owners may put the interest in the business at risk. A buy-sell agreement should include terms that indicate what happens should a member file for bankruptcy.

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