A business partnership is analogous to a relationship. Initially there is a courtship where two people get to know one another. Maybe a business plan is created during this stage of the relationship or maybe just the concept of a business. As the relationship progresses and it becomes more serious, one person may pop the question: Will you be my partner? This is a huge commitment for both individuals and a tough conversation.
How much equity? How will we pay personal bills? What is the time commitment? What are the roles? There are dozens of items that need to be covered. Answering all of the important questions before moving forward with the partnership is incredibly important because it will reduce the potential for misunderstandings between the partners. Another tough question that needs to be addressed is the potential separation of the partnership. A buy-sell agreement, similar to a prenuptial agreement to marriage, governs situations where a business owner dies, files bankruptcy, becomes disabled, retires, or otherwise leaves the business.
No one wants to think about divorce or ending a business partnership. However, putting everything in writing while the parties are friendly is essential. It will create a roadmap for resolving common issues and will ultimately reduce the chances of a dispute.
What will happen in the event of death or disability of a business partner?
A buy-sell agreement may require the business to purchase insurance on both business partners. Thus, in the event of death or disability, the life insurance or disability insurance policy would provide the necessary funding for the business to buy out that partner's interest. Without an effective buy-sell agreement, a deceased business partner's interest would pass with his or her estate. This could result in a lengthy legal process for the surviving business partner.
What will happen when one business partner decides to voluntarily leave the business?
An effective buy-sell agreement details the procedures for valuing the business partner's interests. There is an unbelievable number of ways to value a business. Breaking down the method of valuation before any issues is critical to establishing a long-term business. The buy-sell agreement might also detail how payment should be issued; i.e., lump sum, payment plan, interest rate, and time frame for payment(s).
A buy-sell agreement may also include a right of first refusal. If a business partner decides to voluntarily leave the business, can he or she sell their interest to a third-party?
Trevor Carson is an energetic business attorney. In 2015, he was named by Sacramento Magazine as a top lawyer in Sacramento and was named a Rising Star by Super Lawyers Magazine. Business attorney Trevor Carson focuses on consistency, clarity, precision, and simplicity. Please contact our Sacramento business attorney if you have any questions or want to learn more about the purposes of having a buy-sell agreement.