Ten Fatal Mistakes Business Owners Make: No. 5 Buy-Sell Agreement

The biggest mistake that business owners make is failing to plan.  Failing to plan has some of its most devastating consequences in the context of an owner leaving the business.

Consider the following questions:

Do you want to be in business with your partner’s spouse?  If you don’t plan properly, you may unexpectedly find that you have a new partner if your partner dies or is divorced.

Can your business survive the death or incapacity of one of the owners?  Even highly profitable companies find it difficult to buy out the deceased owner’s interest in the business from cash flow.

What happens to your business if you and your partners cannot agree on how to run the company?  You may spend a small fortune in legal fees separating yourself from the business if you have not outlined a way to resolve disputes.

If you have business partners, you need a buy-sell agreement.  Ideally, you should prepare the agreement when you set up the company.  If you have not already formed set up your buy-sell agreement, do so immediately to ensure that you have a plance in place to address the transition of the business.

A buy-sell agreement typically discussess how one owner can sell his interest to the other owners, setting forth the methods of calculating the purchase price and of establishing the terms of sale.  Not only does it provide a mechanism for resolving disagreements between owners, but it also provides an orderly way to handle the death, disability, illness, bankruptcy, divorce, or retirement of one of the owners.  Among other things, a buy-sell agreement considers the following matters:

  • When can an owner sell his interest in the business?
  • Who is allowed to buy an interest in the business?
  • Under what circumstances may an owner be required to sell her interest in the business?
  • How will the parties determine the value of the interest in the business?

A properly drafted buy-sell agreement allows the ownership and management of the business to continue without having the departing owner’s successor forced on the remaining owners.  It also fairly compensates the departing owner for his interest in the company, while still meeting the liquidity needs of the company.  Once the agreement is in place, you should review and update it regularly to ensure that it continues to meet your individual and company needs.

Avoid the Ten Fatal Mistakes by making planning a regular part of your business activities.  Prepare and regularly review a buy-sell agreement, and your business will boom.

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