Transferring your ownership of your company is a critical transition in your financial life and in the life of your business. Planning when and how you move out of an ownership role requires thoughtful consideration of how to address many possible situations.
The foundation of any transition of your ownership to your co-owner(s) or back to your company is generally a buy-sell agreement. A buy-sell contract structures the terms of a transition of ownership to clarify the terms and triggering events in advance.
These are some of the common parts of a buy-sell agreement that business owners overlook.
Triggering events
When you are thinking about your buy-sell agreement, consider what will put the plan in effect. Often, buy-sell agreements have triggering events such as:
- Death
- Disability
- Termination for Cause
- Deadlock or Disagreement among the Owners
- Bankruptcy
It can be challenging to think of every possible scenario when drafting a buy-sell agreement. When you are constructing your contract, try to think of events outside of the common ones that could be unique to your business, such as losing a professional license.
Funding and financing
An insufficiently funded buy-sell agreement could put you or your business in a worse position than not having an agreement in place at all. If the buyout will not be all cash at closing, consider how the purchase will affect cash flow and be sure to include specific terms such as timing of payments, interest rate, required guarantees and collateral. Also, include any conditions to closing such as releasing the seller from personal guarantees of the business obligations.
As you are deciding what to include in your agreement, think about what could happen if there is an issue with the funding or financing the structure you want. Also, think about who will have the opportunity to purchase your business after the triggering event and what will happen if their financial situation deteriorates.
An excellent buy-sell agreement hinges on having essential details in place. While it can be tempting to look at standard forms for your agreement, it is often best to consult with someone knowledgeable about these types of arrangements and tailor one to your particular needs.