5 Key Life Events Every Buy Sell Agreement Should Address
Owning the business with 1 or more partners brings both pros and cons. Either way, establishing a properly drafted Buy Sell Agreement should be one of the first items partners handle as they embark on this journey and/or before they become very profitable.
In a nutshell a proper Buy Sell agreement addresses what is to happen to the shares of one or more partners in case of certain life events playing out. When drafted properly, agreement will allow the business to not only retain the shares of the “exiting” partner, but will also have enough liquidity to buy those shares from either the aforementioned partner of his/her family members.
Every Buy Sell agreement should at the minimum address 5 key life events:
Death - Probably the most common event being addressed in these agreements. It specifies what is to happen to the shares of the deceased partner, and who has the first right of refusal to purchase them. It is meant to assure that the business can buy the shares from the family members of the deceased partner and the pre specified valuation.
Disability - Very similar to the above-mentioned death event, except the trigger for the purchase of shares is the disability of one of the partners. Typically, these are structured in a way that give a disabled partner a period of time to get better and come back to the business before it is enacted.
Retirement - Addresses what happens to the shares when one of the partners wishes to retire. Unlike death or disability events, this one is typically not done as a lump sum purchase, but is instead handled over a period of years in an installment buy-out fashion. It does pre-specify what type of valuation would be used to buy the retiring partner out.
Voluntary Exit - The trigger here is the desire of one of the partners to leave the business and not be a part of it going forward. Depending on the valuation of the business and revenue stream, this one can be handled with the all cash buy-out or installment buy-out. As is with the retirement trigger, what type of valuation would be used in the buy out is pre-determined.
Divorce - Most commonly missed event in the Buy Sell Agreements. Gives the business the right of first right of refusal to purchase the shares from the ex-husband/ex-wife of one of the partners in case he or she was rewarded these shares as part of divorce.
For more detailed information, review of your current agreement, or to simply see which of these might apply to your situation simply schedule a 45-minute discovery call.
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