In the event that death, bankruptcy, divorce, or a material dispute between business partners occurs, it is important for preparations to be made in advance of such unpleasantries. One of the most important contracts in a business relationship, the buy-sell agreement, helps address these situations. If you are contemplating whether to formalize a buy-sell agreement or considering improving your existing buy-sell agreement, here are several advantages that well written buy-sell agreements provide to your business:
Create Exit Strategies
A business owner might wish to leave a business for several reasons, and buy-sell agreements help create detailed exit strategies. In the event of a sudden health crisis, you could be forced to exit your role in a business and a buy-sell agreement can address these moments. If an unexpected death occurs, a buy-sell agreement can help pay for the departing member’s interest. Lastly, if you are leaving a company due to a business dispute with your partner, buy-sell agreements can lay out the price of the departing owner’s stake in the company, eliminating further work and avoiding potential lawsuits.
Protect the Company
A well drafted buy-sell agreement should describe the exact methods for valuing a company’s interest, preparing a set formula for when the company is sold based on the circumstances. It should also quantify what period of time the company has to pay out the departing equity owners of the company, thus providing the business, and the remaining owners, time to come up with funds from ongoing revenues. Lastly, buy-sell agreements can even describe future business management ensuring that the business will carry on as strong as ever after unseen events.
As previously mentioned, buy-sell agreements should contain methods for how to evaluate the worth of a business. Without the presence of these formulas, the IRS can determine its own value of the business. Buy-sell agreements also typically contain clauses establishing how to tax the estate upon its owner’s death, which minimizes estate tax payments. A company’s buy-sell agreement can restrict the ability of a shareholder to transfer shares outside the current ownership without the consent of the other owners preventing the loss of tax benefits for certain business entities.
Preserve Good Relationships
A buy-sell agreement defines boundaries, which help in minimizing the risk of misunderstandings among partners. Without a buy-sell agreement in place, a partner’s stake in the business can be transferred to third parties. Buy-sell agreements can provide the remaining partners of a corporation a right of first refusal and other types of ownership control over changes in the company, including restricting the ability of a shareholder to transfer shares outside the current ownership without the consent of the other owners, thereby providing a certain level of stability and continuity among current owners.
If you are debating to create a buy-sell agreement, have any questions about an existing buy-sell agreement, or want to discuss such a venture with an experienced business lawyer in Los Angeles , contact the prestigious and highly successful Hakim Law Group. We are here to help! For all inquiries please contact us at 310.993.2203 or visit www.HakimLawGroup.com for further information.