Why Is A Buy Sell Agreement Necessary?

Why You Should Have a Buy and Sell Agreement?

A  buy-sell agreement is more than just hoping that things work out. It is a thought out, legal plan of action for transfer of ownership from one party to the other.

Want more than just “living on a prayer”? Most business professionals know that “hope” is not a good business strategy. We all hope for the best while running our business, but things don’t always go the way we want it. Realistically speaking, businesses fail all the time. And the failure to anticipate this possibility leads to even more trouble for all parties involved.

A buy and sell agreement can somewhat mitigate the damage. It’s safe to say that without it, a number of bad things can happen to your business.

Nuts & Bolts of The Agreement

This type of agreement, also known as a buyout agreement or buy-sell agreement, is a contract that provides for the sale of an owner’s share of a business. This occurs when one of the business owners suddenly leaves for any reason. This may be triggered by an owner’s death, disability, retirement, bankruptcy, or any other reason for departing.

This agreement ensures that the departing owner will have to (or be able to) sell their shares when the time comes, and the other party will have to buy it. The buyer may also be a third party or an employee, depending on what was agreed upon in the legally binding document. Let’s talk about why every business should have a buy and sell agreement.

We recommend that you hire a lawyer to review your buy-sell agreement so that it is fair for all parties concerned.

Why You Need a Buy and Sell Agreement

Many entrepreneurs don’t realize this, but a buy-sell agreement actually plays a crucial part in preparing for your business’ future. Without it, your shares may end up in the wrong hands. All your hard work may have been for nothing.

Also, if you exit the business without a proper buy-sell agreement, you or your heirs may not receive fair compensation because a ready buyer was not specified in advance.

Without a buy and sell agreement, you may find yourself looking for a buyer on short notice, meaning you can expect the sale price to be far below the fair market value. No business owner wants to sell their business on a fire sale.

It’s also a good way to settle things between surviving owners or heirs who may want to contest their rights and entitlements. With a well-crafted and comprehensive buyout agreement, you eliminate or at least minimize the risks mentioned above.

Owner Protection

It protects the departing owner by ensuring that someone’s going to buy the business when they leave, and it protects the buyer from having to work with an undesirable partner—for example, a departing owner’s spouse or family member who may not have the business’ best interests in mind.

Crafting a buy and sell agreement with a lawyer is important so that both partners can discuss necessary matters. This way, they can answer questions like “what would happen if one of them decided to leave the business out of a conflict of interest?” or “what if the co-owner suddenly passed away and his or her spouse wanted in on the business?”

A buy and sell agreement will keep the business in the right hands. It will determine who is allowed to buy the business, and for what price. It also specifies a fair price for the business by detailing how the company should be valued.

It’s a good idea to get this agreement reviewed by an attorney to make sure every important detail is specified. Work with Gudeman & Associates Attorneys today!

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