Buy-Sell Agreement Needed

By: Carl F. Staiger, Esquire cfs@muslaw.com

A buy-sell agreement is a contract between business partners that describes the framework for transferring ownership of the business. A buy-sell agreement is important for all businesses, and particularly for businesses owned by baby boomers, most of whom will probably be retiring within the next 10 years.

The buy-sell agreement is a "last will and testament" for business partners that determines the process for transferring ownership if the partners want to split or if one partner dies, retires, becomes disabled, is divorced or just wants out. The agreement should address not only the events that trigger a transfer of ownership, but also the method for valuing the company.

Partners often don't think about how they will fund the purchase of the business under the agreement. Neither partner may have enough money to satisfy the obligation to buy the business. To make sure there is money to enable the business to be purchased by a partner, the partners should consider funding buy-sell obligations with life insurance.

Finally, a business owner shouldn't assume that a one-size-fits-all buy-sell agreement exists. Every business situation is different. For example, the terms of a buy-sell agreement between unrelated business partners may be significantly different than the terms of a buy-sell agreement between family members. Tax issues also may play an important role in structuring a buy-sell agreement.