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How a Buy-Sell Agreement Can Avert a Bad Business Breakup

“Business divorce” is an apt term for the often messy and tumultuous ways in which a closely held business can undergo a momentous change. Just as with a marriage, small business breakups are often emotional and disruptive since they create rifts in once-steadfast relationships. No one starting up a business wants to contemplate its breakup, but it is advisable to take precautions nonetheless. One positive action is to enter a buy-sell agreement.

Continuing the analogy to marriage, a buy-sell agreement is like a prenuptial agreement. It can provide a methodology for how owners’ shares may be valued and reassigned if any owner leaves the business, either voluntarily or otherwise. It can also place restrictions on what actions can be taken with regard to the departing owner’s interests. Once signed, the agreement can be stored away until needed.

A buy-sell agreement can avoid an unpleasant breakup by providing for the following:

  • Smooth transition — A buy-sell agreement defines the process for transition in case of an owner’s departure, whether due to resignation, retirement, ouster or unforeseen circumstances like disability or death. Having a plan in place for transferring the owner’s interest can avoid costly battles for control, minimize disruption and help maintain business stability.
  • Setting a fair price — Closely-held businesses are not valued based on market indicators, so ownership shares are difficult to measure in dollars. A buy-sell agreement can set a pricing method that all owners agree to or it can establish a valuation method, such as specifying a third-party to serve as an appraiser. 
  • Keeping control —A buy-sell agreement gives current owners the power to keep out intruders with incompatible values or interests who may wish to take an ownership stake. It allows co-owners or the business itself to retain the right or obligation to purchase a departing owner’s stake, effectively acting as a gatekeeper against undesirable takeovers.
  • Staffing security — A buy-sell agreement can provide stability for remaining owners and key non-owner employees, since they can be assured the of business’s future. This can boost morale and can also help in recruiting new talent.
  • Funding the transition — A buy-sell agreement can provide for insurance policies and other financing to be obtained to make sure purchasing owners or the company itself have the funds to pay for the departed owners’ shares. 

The main objective of a buy-sell agreement should be to carry out a change of ownership with the lowest possible interruption of business operations. An experienced business divorce attorney can help you put a well-structured agreement in place, one that includes provisions anticipating a wide range potential contingencies.

H. Clay Parker, Esq. advises Central Florida clients on a full range of contract matters, including employment contracts. Please call 407-216-2504 or contact us online to schedule an appointment at our Orlando office.

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