As a budding entrepreneur, you may be focused on growing your business, scaling your product, and building your team. However, have you considered what happens to your business in the event of unforeseen circumstances like retirement, disability, divorce, or even death? This is where a buy-sell agreement comes into play, and it's an absolute must-have for any business owner.
What is a Buy-Sell Agreement?
So, what is a buy-sell agreement? It's a legally binding contract between co-owners of a business that governs what happens if an owner leaves the business. It is often likened to a prenuptial agreement for businesses, helping to protect your financial future and the continuity of the business. It is advisable that you engage an experienced business lawyer to help you draft the perfect buy-sell agreement for you.
Top Ten Key Elements in a Buy-Sell Agreement
Here are the top 10 key elements you need to include in your buy-sell agreement to safeguard your business interests.
1. Parties Involved:
The agreement should clearly outline who the current business owners are. This includes partners, shareholders, or members, depending on your business structure.
2. Triggering Events:
Specify the circumstances under which the agreement will be activated. These could include death, disability, bankruptcy, divorce, voluntary departure, or expulsion of an owner.
3. Valuation Clause:
To prevent future disputes, your agreement should include a clear formula or method for determining the value of the business at the time of the triggering event.
4. Buyout Terms:
These outline how the buyout will be financed. Options might include installment payments, business insurance, or an owner's personal assets.
5. Right of First Refusal:
This gives current owners the right to buy the departing owner's shares before they're offered to outsiders, helping to keep the business "in the family."
6. Non-Compete Clause:
A non-compete clause can prevent an owner from leaving, starting a similar business, and taking your customers.
7. Preemptive Rights:
If an owner decides to sell their shares to an external party, preemptive rights give the other owners the right to buy those shares first, on the same terms.
8. Funding Mechanisms:
Life insurance or disability buy-out insurance are common ways to ensure funds are available for the buyout when a triggering event occurs.
9. Dispute Resolution:
To prevent costly litigation, your agreement should include a dispute resolution process, which could involve mediation or arbitration.
10. Agreement Review and Updates:
Businesses evolve, and your buy-sell agreement should, too. Include a clause for periodic reviews and updates to the agreement.
Navigating the ins and outs of a buy-sell agreement can be complex. Again, don' t be afraid to engage a business attorney to help you. Regardless, getting this agreement right is crucial to ensuring the continuity and longevity of your business. As a business owner, your focus is rightly on growing and nurturing your business. Yet, it's equally important to plan for all eventualities.
Remember, a well-drafted buy-sell agreement isn't just a legal necessity; it's peace of mind. With this agreement in place, you can rest assured knowing that your business interests are protected, no matter what the future brings.
Spiller Law is an advisor to startup businesses, entertainment and media companies, and artists. Feel free to schedule a free consultation.
Spiller Law is a San Francisco business, entertainment, and estate planning law firm. We serve clients in the San Francisco Bay Area, Silicon Valley, Los Angeles, and California. Feel free to arrange a free consultation using the Schedule Appointment link on our website. For other questions, call our offices at 415-991-7298.
The information provided in this article is for general informational purposes only and should not be construed as legal advice or opinion. Readers are advised to consult with their legal counsel for specific advice.