Buy-sell agreement key part of business plans

Expanding a business is exciting and fun. Everyone is looking forward to the future with plans for continued growth and success.

It is also the time when critical business decisions are being made and business relationships are being structured. It is prudent to put these decisions in writing and to record the relationships that have been developed. It is the appropriate time to define who has what interest(s) and rights in the business and how these rights can be exercised.

Protect your investment

When people go into business together, the obvious primary goal is to make money. In pursuit of this goal, much hard work, time, and money are invested. People plan on having the business both as a financial resource by which the person can make a present living and as a form of security for him or her and the family in the future. A buy-sell agreement is often one aspect of retirement planning, death planning (for the estate), or as a vehicle for an on-going business opportunity for adult children. There-fore, it is important to take care of this investment so that if certain conditions arise, the investment made is not lost.

The primary purpose of a buy-sell agreement is to define how under those circumscribed conditions an owner of a business can have the opportunity to buy out the other owner(s), sell out to them, and what will occur in the case of death or disability. It is a written agreement between the owners of the business (and those with "quasi" or "equitable" ownership interests) and will be binding under a court of law. Traditionally it delineates the particular form, process, and in what amount one owner can buy out the other and/or sell his or her interest to the other. It can also delineate how others (current non-owners) can buy into the business and under what terms.

There are a number of reasons for doing a buy-sell agreement. Generally, one is implicated when two or more individuals go into business together; when expanding a current business and/or add-ing on a new branch, subsidiary or sister company; when a portion of the business is promised to an employee; when a sales territory, dealership, or distributorship is purchased; when going into a joint venture; and when entering into business with family members.

Given the propensity for changes to occur in a business and in the accompanying relationships, putting together a buy-sell agreement is a smart business move. It is not unusual, even in those individuals with the best of intentions, for disagreements to occur over how to run the business, what product lines should be expanded or disbanded, how to finance the company, etc., for personality problems or power struggles to develop, or for discontent to grow as changes occur in the business. Sometimes one of the parties just begins to lose interest, while another finds it is their true niche. People develop health problems, change their family relationships, decide to retire, and, ultimately, they die. All of these factors have consequences to the business and your investment in it. A buy-sell agreement can spell out what is to take place in the event they occur.

Put it in writing

Although it is preferable to execute a buy-sell agreement when the business relationship is beginning, the business and roles of those involved often are of a developing nature and evolve over time. Fortunately, buy-sell agreements can be done after the fact. So, even if the business is already established or expansion has been completed, it isn't too late to employ a buy-sell agreement. In fact, it is often after the transaction has taken place and promises and oral agreements have been made or understandings have developed between the principals, that people often start wondering if they should have gotten something in writing. Particularly, if there are subsequent and/ or unexpected changes in the business or if the relationship starts to go sour, people find themselves wishing they had some type of written agreement in place.

Even in those relationships that develop and continue to grow in a positive manner over time, the life cycle catches up with all of us at some point and we begin to consider slowing down or retiring. At that time, a buy-sell agreement that was put into place many years before can come in handy as it may provide for a lump sum buy-out or a payout over time so that you continue to receive a regular check, or a combination thereof. Also, in the case of death, the buy-sell agreement can assure that your family members retain the benefits of your investment in the company.

Sometimes it is tricky getting the other party to agree to make up a formal agreement as to the relationship, especially if it is after the relationship has already been established. But, there are a number of approaches that can be used and, usually, after being properly approached about the matter, the other party begins to see that it is in the mutual best interest of the each of the owners and in the best interest of the company to have the rights of those involved spelled out and in a manner that best facilitates a smooth and equitable transition for the business. In the end, it gives everyone involved a sense of security in knowing that they have taken steps to secure their interests and investments in the business.

(Jackie Barrow is a business/corporate lawyer in Moberly. The Mis-souri Bar Association provided this article.)