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Why Does Your Small Business Need a Buy-Sell Agreement?

Posted by Jonathan Krems | Dec 19, 2021 | 0 Comments

In today's Freedom Friday blog and email newsletter, we're once again going to answer one of those questions that are maybe less frequently asked, and that is, “Why does your small business need a buy-sell agreement?”  Now, first of all, if you're a solopreneur, or the only owner of your small business, you do NOT need a buy-sell agreement.  However, if you are one of the members or owners of a multi-member LLC, then yes, you do need a buy-sell agreement, and it can be included in your LLC operating agreement, or a separate agreement.

Before I explain why your small business needs a buy-sell agreement (and this is because your business has more than one owner), you also might be asking, “What's a buy-sell agreement to begin with?”  A buy-sell agreement is a contract, often a provision of an LLC operating agreement, in which the business owners make an agreement with their fellow business owners as to what happens to their interest in the business when a “triggering event” occurs, such as death, incapacitation, divorce, or bankruptcy.

So, why does your small business need a buy-sell agreement if you have more than one business owner?  Well, think about what might happen if you do NOT have a buy-sell agreement in place.  Usually a lawsuit and a business litigation attorney's dream.  In-fighting in a family, disputes between business partners and the family of the deceased or incapacitated business owner's family, lawsuits to determine the intentions of the business owners, and long, drawn-out court proceedings that don't really resolve the issues to anyone's satisfaction are all possible.  No one is happy.  This is why your small business needs a buy-sell agreement if you have more than one business owner.  All of this mess can be prevented.

So, how does a buy-sell agreement work?  A buy-sell agreement will set forth certain events which will trigger a buyout of the co-owner's interest in the company, either by the other owner or owners, or the company itself.  Examples of triggering events include death, incapacitation, divorce, and bankruptcy.  A triggering event can also be when one of the owners desires to leave the business.  The buy-sell agreement will specify not only who can purchase the ownership interest of the departing owner, but at what price and under what terms.

Nobody likes to plan for their death or departure from their business, especially if they are young.  However, the process of negotiating a buy-sell agreement is more easily accomplished at the beginning of a venture.  All the business owners can determine the fate of their ownership interest and agree on the terms of a buyout when the parties are mutually interested in coming to a solution and there is no sense of urgency.  Entering into a buy-sell agreement early also gives the parties time to consider how to value the business when the time comes and how the other owners or the company will finance the eventual buyout.  Sometimes the funding will come from life insurance policies held on the participating owners' behalf to ensure sufficient funding (e.g. a “Key Man” insurance policy).

If you are interested in starting a small business anywhere in Oklahoma, or you need legal help building, protecting, or defending your small business or other assets, please contact me at [email protected] to schedule a FREE strategy session.

For more information about Liberty Legal Solutions, LLC, please visit our website at http://www.libertylegalok.com/

About the Author

Jonathan Krems

Jonathan is the Founder and Managing Attorney of Liberty Legal Solutions, LLC, a law firm dedicated to building, protecting, and defending the business and personal interests of our clients in Oklahoma.  Jonathan's primary practice areas are business law, contracts and agreements, business liti...

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