Friday, November 21, 2008

Why Does a Business need a Buy-Sell Agreement?

My first, smart-alecky answer to my question is for the same reason as for getting a prenuptial agreement before a marriage. Except that no want to consider the failure of a marriage while business failures occur daily. Some failures occur because of no buy-sell agreement.

TLD's General Counsel Blog's Business Divorces has a good description why a business needs a buy-sell agreement and how they should operate:

A buy-sell agreement is a way for two partners beginning a business to decide when, how and at what price their "business divorce" will play out. We recently drafted a buy-sell agreement for a group of individuals beginning a cellular accessories distribution business. The three individuals were equal shareholders, all were on the Board of Directors, and all three were employees of the corporation.

One of the shareholders decided he could get a better business opportunity by taking business leads from the company and diverting them to himself for his own personal gain. The other partners found out about what was going on and wanted this partner out of the corporation. Without a buy-sell agreement in place, this partner could be fired as an employee, but the re-purchase of that individual's shares is generally not possible. The law does not provide for a requirement of non-employee shareholders to sell their shares either to the corporation or to the other partners.

With the Buy-Sell Agreement in place, these shareholders were able to compel the repurchase of the shares, give a price for the re-purchased shares, and gave them a significant bargaining power
As the post goes on to state, the best time for creating a buy-sell agreement comes at the start of the business relationship but if not done then get one as soon as possible.

And something for those of the DIY crowd, take a look at what you are doing by yourself and see if it includes a buy-sell agreement.