Buy-Sell Agreements: 7 Reasons to Have Them for Your Business

Buy-sell agreements are essentially types of contracts that detail how a business may be impacted by certain events that may affect its shareholders. Also referred to as buyout agreements, buy-sell agreements can offer business owners various protections in the future, potentially preventing them from having to go through costly litigation when changing circumstances affect business owners’ holdings in a given company.

Taking a closer look at buy-sell agreements, in this blog series, we will highlight some of the most important reasons that business owners should have these agreements in place.

When you are ready to develop buy-sell agreements – or when you need assistance with any business-related legal matter, you can turn to experienced Denver Business Attorney Thomas E. Downey for experienced help and the best possible representation.

Here’s How Buy-Sell Agreements Can Help Protect Your Business

Buy-sell agreements can be beneficial for your business by:

1 – Addressing valuation and succession issues

As businesses grow and their founders or owners look towards retirement, buy-sell agreements can provide provisions that detail how an individual’s shares in a business are to be evaluated and/or passed on to that person’s chosen successors. Depending on the needs of a given business, as well as the wishes of its owners, this element of buy-sell agreements can specifically require that shares in a business:

• Be evaluated annually or at such times that succession issues arise
• Be made available to certain family members first (such as to children before more distant relatives)
• Will NOT specifically be transferred to certain people, which may be an important provision if there are multiple family members working for a business and these relatives all believe they are entitled to some shares in that business in the future.

2 – Specifying how certain family dynamics may impact a business/interest in the business

When families share ownership in businesses – or when one family member owns a business that other relatives work for, detailing just how the family dynamics can play out in the business and potentially impact the shares in the business can be another crucial reason to have buy-sell agreements for that company.

For instance, let’s say a business owner has an adult child who may be considering marriage. If the business owner specifically does NOT want his future in-law to have a share in the business through the marriage, then buy-sell agreements can specifically prevent this from occurring, and having such provisions in contract form can be essential to:

• Clarifying relatives’ expectations regarding their interests in the business
• Minimizing the possibility future family disputes over that business.

More Ways Buy-Sell Agreements Can Be Beneficial

3 – Detailing dispute resolution options for business owners

Ideally, business owners will have the same vision for their business throughout the life of that company, and they will agree on the major decisions that are necessary for growing that company.

In actuality, however, business disputes can arise for various reasons, with some of the more contentious disputes between business owners typically arising when issues related to ownership in the company arise.

With buy-sell agreements, however, the manner in which these disputes are to be resolved can be detailed, and this can be crucial to:

• Minimizing the chances that expensive litigation will be necessary.
• Keeping the nature of certain disputes confidential (which can occur, for instance, when business owners agree to mediate or arbitrate disputes, rather than resolve them in court).
• Resolving business owners’ disputes as efficiently as possible so that the owners can get back to running their company.

4 – Stipulating how shares in a business can be sold/purchased in the future

When people start their businesses, they probably aren’t thinking about if or when they may want out of the business in the future. However, because things change and business owners may decide that they want to move on from a given business years down the line, having specific details for how this will happen can be critical to an efficient, smooth transition that, ideally, will not impact the operations or profits of a given business.

In fact, with this aspect of buy-sell agreements, business owners can outline:

• When shares in the business can be sold
• Who is eligible to purchase these available shares (such as whether business owners need to make the shares available to other owners before the shares are offered to outside buyers)
• How these shares are to be purchased.

5 – Detailing how life-altering events for business owners will impact a business

The one constant in life is that things are always changing. In order to be prepared for such changes – particularly the ones that will alter people’s lives dramatically, savvy business owners can specify in their buy-sell agreements just how certain life events may impact a business and owners’ share in that business.

For instance, buy-sell agreements can specifically provide details about how events, such as the following, are to be handled when they impact any of the business owners:

• Marriage and/or divorce
• Personal bankruptcy
• Significant disability or incapacitation
• Death.

6 – Dealing with certain estate tax issues

Estate tax issues may come into play when a business owner passes away. In such cases, buy-sell agreements can provide detailed formulas for calculating the value of the decedent’s share in the business so that the estate tax obligations related to that share can be appropriately determined and met.

Here, it’s also crucial to note that:

• Whether or not the other business owners are related to the decedent can impact how valuation and estate tax issues should be dealt with in buy-sell agreements.
• Not fixing the valuation of a business may be more beneficial in certain circumstances.
• An experienced attorney can help business owners work out this provision in order for surviving business owners and/or beneficiaries to realize the most estate tax benefits.

7 – Guiding future management choices

Buy-sell agreements can also be powerful ways for business founders to ensure that their founding vision for a business will continue to be upheld by future owners of that business. For instance, with this aspect of buy-sell agreements, business owners can provide some guiding principles for resolving business disputes, keeping the shares of the business in the family, etc.

So if you have some strong beliefs about how your business should operate now, as well as after you are no longer directly managing or involved with it, developing a buy-sell agreement can ensure that your wishes are carried out in the future (to the extent possible).

Denver Business Lawyer at Downey & Associates, PC

Are you ready to develop a buy-sell agreement for your business? Or do you need help resolving any business legal issue? If so, you can turn to Denver Business Lawyer Thomas E. Downey. He has the integrity, experience and resources necessary to ensure that you will receive the highest level of personal service, the highest quality legal services and, ultimately, the best possible outcomes to your important business legal matters.

To learn more about how Attorney Thomas E. Downey can help you, call us at (303) 813-1111 or email us using the contact form on this page. From our law offices in Centennial, we serve clients throughout Colorado and the U.S.