A buy-sell agreement (“BSA”) is a great document. BSA’s can be used for corporations, limited liability companies and partnerships. Often, a BSA is embedded in the Operating Agreement of an LLC or the Partnership Agreement of a general, limited or limited liability partnership. The form of a BSA is far less important than are its contents. So, don’t get confused by the name of the agreement. Rather, consider the purpose and content of a BSA. I’ll write about the substance of BSA’s in a future blog. Here, I want you to consider WHY you should consider a BSA for your business partnership.
BSA’s serve several important purposes, such as these:
A BSA can prevent disputes over control of a company.
HOW? A well-written BSA establishes when and how one owner may or must buy the ownership of another owner. If disputing owners know the outcome of their power struggle, they are less like to fight. The end result is already decided. Generally, people fight, when they believe they can make gains through the process. BSA’s reduce the opportunities to gain through struggle, and thus reduce disputes/lawsuits.
A BSA creates a market for your ownership interests.
HOW? There is no market to sell partial ownership interests in most small companies. There is no stock exchange for such “closely-held” companies. A BSA can create a market by requiring one owner to buy the other owner’s shares under certain circumstances, which we call “triggering events.”
“Triggering events” are bad things that can happen to any business owner. The key triggering events are:
- The death of an owner.
- Marital divorce.
- The disability of an owner.
- Unwillingness of an owner to continue the business. I call this “disinterest.”
- Retirement by an owner.
- Dissolution of the company.
A BSA can further your Asset Protection Plan.
HOW? Under certain circumstances, a BSA can make it extremely difficult for the creditors of an company to get at the ownership interests of an owner.
A BSA enables you to keep your company longer.
HOW? If your partner “triggers” your buy-sell agreement, you can agree in the BSA to a payment plan. So, in other words, if you have to pay $80,000 to buy your partner’s ownership interests, the BSA can provide for terms. Typically, you agree to a down-payment, a modest interest rate on the balance and payments over time. That enables the “buying” owner to keep the business going, rather than being forced to sell the company or key company assets. Having to buy-out your partner is an extraordinary expense. A BSA can make those payments manageable.
Much, much more.
There are other advantages to BSA’s. There are also disadvantages. Whether a BSA is right for you depends on a number of factors. Your CPA and attorney can help you determine if and how a BSA should be used.