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Careful consideration of a buy-sell agreement for a new business

Here at Stephenson Fournier, we assist new businesses in Houston, across Texas and beyond in all legal aspects of formation. One important consideration is whether the owners should sign a buy-sell agreement to plan for the transfer of an owner's portion of the business should he or she leave.

Typically, this becomes an issue in closely held or family corporations, partnerships, professional practices and similar entities. The buy-sell agreement creates a binding plan for what will happen in case of co-owner retirement, disability, exit, death or similar departure. Other trigger events could be co-owner bankruptcy, misconduct or criminal conviction.

Purposes

Normally, the remaining owners do not want outsiders to enter into the business and the buy-sell agreement prevents this. It can deter conflict involving financial interests, business management and future co-owners. The agreement can also reduce taxation.

Another common scenario the agreement can plan for is the divorce of a co-owner. The buy-sell agreement can prevent a co-owner's ownership interest from becoming part of the owner's property subject to division in the divorce, which could create the potential for an ex-spouse to become a co-owner.

Similarly, if the co-owner's business share becomes part of his or her estate upon death, the heirs or beneficiaries would have potential ownership interest.

Terms

Typical provisions of a buy-sell agreement concern the value to be placed on the departing owner's share, the identity of who will be allowed or required to purchase that ownership share and the source of the capital.

Price can be predetermined (subject to inflation enhancement if desired) or the owners can agree to a valuation formula. This can be especially helpful for a small business without a clear market value because the owners would not want to offer it for public sale or no potential buyers exist because of the enterprise's closely held or family nature.

Sometimes, the co-owners agree to split the cost of buying back the share of the departing owner, for example, or for the business itself to purchase it. A family business may create a succession plan for a particular relative or employee to step in automatically.

One common provision to cover the share buyout is for the business to purchase life insurance policies on each owner and then use the proceeds to purchase his or her share upon death.

An attorney can help the owners of a new business to create a buy-sell agreement in line with their long-term goals.

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