Business Buy-Sell Agreements: Mistakes to Avoid (Part 1)
August 22, 2016 - Posted by: admin - In category:
If you are the owner of a family business or other closely held business, not having a buy-sell agreement may be a big mistake.
Let’s get this out-of-the-way: I am a business law attorney who gets paid to work on things like buy-sell agreements. Therefore, it is no surprise that I am talking about why you might need one. It’s kind of like a dentist who tells you about the benefits of regular visits to the dentist, right? Well, as with the dentist, just because the message is coming from someone in the “business” of such things, the truth of the message is not negated by the messenger. In the same way, even if you never retain my firm to work on your corporate law and business law matters, if you own a business that is privately held (i.e., not a public company), then you probably need to learn about these things.
Next, let’s identify the topic for discussion. What exactly is a buy-sell agreement and why would you want one? As the name indicates, a buy-sell agreement is a legal document which outlines the terms and conditions for one or more owners of a company to sell their respective ownership interests in said company to another party. Most often, the buyer of such interest is the company itself or the other owners. Key employees or family members of the departing owner(s) are also frequent buyers and transfer recipients. There are a great many potential methods and structures for a buy-sell agreement. These arrangements can vary as much as one company varies from another and to the extent the needs, desires, and preferences of one person differ from another person. In other words, this is NOT a “one size fits all” consideration.
Ok, with that lengthy introduction and disclaimer, let’s get to the topic at hand. Mistake #1 when it comes to buy-sell agreements is using a cookie-cutter form, downloaded from the internet or copied from someone else, which was not written for you, your business and your situation. Why does this matter? Well, let’s use a medical analogy. Consider a case where you go to the doctor for an examination and treatment, and the doctor walks into the room with a chart of information, tests, and diagnosis from the patient he saw last week. The doctor then prescribes medication and other treatment items which are consistent with the information on his chart and will be very appropriate and helpful for that other patient, but which are in no way suitable or useful for you. How does this relate to the internet or borrowed legal form? That form was written for another set of circumstances (not yours) and was intended to be used by and for another set of individuals and a different business. Does that make a difference? Of course it does.
One of the primary purposes of a buy-sell agreement is to provide an orderly and agreed-upon path to transition some or all of the current ownership of the company to future ownership upon the occurrence of one or more triggering events. If you download an internet form which deals primarily with a trigger event related to the death of an owner, but you actually are desirous to have one or more situations which permit ownership transition before a death, that form of buy-sell agreement likely won’t be of much help to you or your business. Likewise, if the borrowed legal papers provide for a valuation and payment mechanism which is wholly irrelevant and unreasonable in your situation, then again, you have a document that is not very much use for you and your business. The list of possible mismatch and inapplicable provisions in a borrowed legal form could be quite significant. Just as you would never use the prescription of another person (if you are wise), so, likewise, you should not use legal papers which were written for another person.
Even if you read a borrowed or downloaded legal form and it makes sense and seems to work ok for you, there is the genuine chance that it is still missing many important items that are key for you, your business and your situation. In other words, what is there in the document may seem understandable and correct, but what about the stuff that is not there? You are not likely to know what you don’t know. This is yet another potential problem with using a legal form written for another person. Things which were not included (intentionally or otherwise) in another setting may be very much needed for your situation.
In summary, you have spent much time, energy and money in starting, building and operating your business enterprise. Why then would you want to be penny wise and pound foolish when it comes to planning for the long-term viability and orderly transition of your business?
You should view professional assistance in the same way in which you view other business expenses. On the bright side, like such other business expenses, accounting, tax, legal and other similar professional services directly related to your business usually are tax-deductible (at least in part).
We will talk more about buy-sell agreements and how they are important to your business later.