If you own a business with another individual – partnership, LLC, or corporation – you may have wondered what happens if one of you dies? Or for that matter, what happens if one of the owners becomes disabled or quits working? What if you and your co-owner just don’t get along or don’t see eye to eye? In the absence of an agreement, either nothings happens or in the event of death the heirs/devisees of the deceased become owners in your business.
“Buy-Sell” contract provisions or a “Buy-Sell Agreement” are a short-hand reference for an agreement among owners of a business that provides for an orderly sale of the business upon the happening of a triggering event. Such triggering events could include the death, disability or termination of employment of an owner. The triggering events might also include other contingent events, like the sale of the business or the public offering of its stock. What happens upon the triggering event? Usually the other owner(s) offer or are required to buy out the selling/triggering owner. The cash for such a purchase may come from life insurance on the deceased owner or other assets.
Five reasons to have a Buy-Sell Agreement included in your Operating Agreement, Partnership Agreement, Shareholders Agreement, or on its own:
1. I don’t prefer my deceased co-owner’s heirs as my new partners;
2. I want my heirs to get immediate cash for my ownership stake in the company if I die;
3. I want an orderly legal path for under-performing or disabled co-owners;
4. I want an exit strategy for me if the company is purchased;
5. I plan to retire and my succession plan is to have my co-owners fund part of my retirement.