Why a Buy-Sell Agreement is Important

A Buy-Sell Agreement is one of the most important documents that any business start-up can have when that business is owned by more than one person or by more than a husband-wife combination. Yes, the addition of this document adds to the initial start-up costs and, yes, it involves planning for negative events such as death or disability of an owner, divorce, bankruptcy, default and the like. 

These are pessimistic outlooks when the new owners’ thoughts are focused only on positive outcomes — a natural inclination because it takes optimism to start a business. But having a plan in place at the beginning when all of the owners are healthy and getting along can save significant cash and headaches later. And, a Buy-Sell Agreement can better protect the business itself as well as the owners.

Part of the joy of owning your own business is choosing who your business partners are, and building something for yourselves and your respective families.  Don’t let the absence of a Buy-Sell Agreement derail that plan. Odds are high that when owners delay forming a Buy-Sell Agreement, one is never formed.

Business owners like to hope that bad stuff will never happen to them, but then it does.  And certainly all business owners will die one day. A Buy-Sell Agreement maps out, in advance, what happens when certain events occur.  For example, when one owner dies, is the entity required to buy out the deceased owner’s interest, thereby providing some financial security to the deceased owner’s family? How is the purchase price to be calculated, and when is the money to be paid?

What happens if one of the owners gets a divorce or there is a personal bankruptcy and an outsider spouse or other person gets an ownership interest in the business? Without a properly drafted Buy-Sell Agreement, the owners may find that they are now dealing with a “partner” that they don’t want.

A Buy-Sell Agreement can also provide for what happens if a working owner becomes disabled or wants to retire.   It can further spell out what happens if one of the owners fails to make required distributions of money or property.  In that case, perhaps the other owners have the right to buy out the defaulting owner’s interest at less than fair market value.

These are just some of the scenarios than can be addressed in a Buy-Sell Agreement. When you build a new house, you don’t like to think that it could be harmed by fire or storms. Yet, you buy homeowner’s insurance as soon as you build the house.  Much like you wouldn’t build a new house without also buying homeowner’s insurance, it is not wise to start a multi-owner company without also signing a Buy-Sell Agreement. Expect the unexpected.

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Disclaimer: This Blog is for informational purposes only and is not to be construed as legal advice. If you have questions, please seek the advice of an attorney. An attorney-client relationship is not formed by reading this Blog. If you are interested in Wittenburg Law’s representation of you, you must contact Wittenburg Law for a determination of whether your matter is one for which Wittenburg Law is willing and able to accept representation of you.

Bonnie Wittenburg, Wittenburg Law Office, PLLC, 601 Carlson Parkway, Suite 1050, Minnetonka, MN 55305     952-649-9771   www.bwittenburglaw.com  bonnie@bwittenburglaw.com