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The role of a buy-sell agreement in long-term business planning, part 1

On Behalf of | Oct 30, 2020 | Business Contracts, Business Law, Buy-Sell Agreements |

In the excitement and busyness of starting a new Kentucky business, do not forget that it will eventually wind down, be sold or morph in some other way. Ownership interests in partnerships, corporations and LLCs can change over time, but if you do not put into place binding direction for how to structure such transitions, the outcome could be one no one foresaw or ever would have wanted.

You can plan for future owner exits

This two-part post will discuss the role of the buy-sell agreement in business succession planning. This kind of agreement is between co-owners in which they set out what processes and procedures will be followed should an owner exit the business. Other potential situations the agreement might address is what happens if an owner divorces or files for bankruptcy.

This binding contract, usually negotiated and executed when the business is set up, can be especially useful for a business venture that is family owned or closely held. In other words, the individual owners likely set up the business together and have an interpersonal relationship that is key to business success. In fact, it might be the synergy of the founding owners that was part of the reason they made it a going, profitable concern.

So, what happens when one business partner exits the business? It could be because of disability, long-term illness, divorce, retirement, a desire to exit for personal reasons, a partnership or ownership dispute, or the owner’s death. Each of these situations is handled a little differently, but the scenario that a lack of proper planning can cause is one where the remaining business partners may not happy with how it was handled, with the ownership structure that resulted or with negative financial impact. In extreme situations, the remaining owners may have to wind down or sell the business.

For example, what if the court in divorce awards an owner’s spouse all or of the owner-spouse’s share of the business? Will the remaining owners have to work with the spouse? What if the spouse wants to sell? Could they sell to anyone they want to? The remaining owners may want to keep the business within the family or the original ownership.

Or, what if the business partner unexpectedly dies? Would their ownership interest pass via their will to heirs or beneficiaries? That would leave the remaining owners with little or no control over who would replace the deceased owner. They may instead want to buy the deceased owner’s share to keep the business closely held by those that created it.

In part 2 of this post, we will discuss the usefulness of the buy-sell agreement in alleviating these kinds of unwanted or chaotic outcomes upon owner divorce or exit.

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