The Fear: Your Partner's Spouse — Why You Should Consider Buy/Sell Agreements
Does the thought of being in business with your partner's spouse frighten you? How about their parents or children? Are you adequately protected from that reality?
Set up your Buy/Sell Agreement now to ensure this doesn’t happen to you!
You
have entered into a business relationship with your partner,
fellow shareholder or member of your company and you have
been running a successful business for quite some time. You
and your fellow owner(s) have a great relationship, everyone
works well together. There is a great division of the workload
and teamwork provides peak performance for the productivity
of your business. But have you ever thought about who you
would be in business with if your partner, or co-owner of
your business were to die or divorce? That is right; you might
be forced to be in business with their family. If you are
currently in business with a married person, you would likely
be in business with their spouse. If you are currently in
business with an unmarried person, you would likely be in
business with their children, parents, or siblings. At first
glance, this may not seem so bad. After all, you know them
and they are great people, but how would they really be to
work with? How would you get along in a business relationship?
Do they know anything about your business? Could they step
up and fill your co-owners shoes?
A
Buy/Sell Agreement is an agreement between the owners of a
business that provides for these questions to be answered.
How? A Buy/Sell Agreement is simply a contract that provides
for the sale of a business interest for a specified price,
at a future date, upon the happening of a future event. The
Buy/Sell Agreement can also provide the liquidity necessary
to finance the purchase of the sale of the business interest
from the family of the deceased owner of the company.
Buy/Sell
Agreements are generally established and funded when the owners
of a business are alive and well. Funding is most often accomplished
through the use of life insurance policies that are either
owned by the individual owners of the company or by the company
itself. The key to properly and adequately fund the Buy/Sell
Agreement is to provide enough funding to effect a transfer
of ownership interest in the company that the parties desire
and avoid the transfer of an ownership interest in the company
to an undesired third party simply because of lack of funding.
Lack of funding in these circumstances can also result in
the dissolution of a company.
In addition to death, Buy/Sell Agreements can also be utilized in the event of a divorce. If you are entering into a business relationship, whether it is a partnership, corporation, or LLC with a person that is married, you may want to ensure that you are not forced to be in business with their spouse should their marriage dissolve. These agreements are utilized in this manner by providing that should any relative by marriage of the founder of the business be divorced from a blood relative of the founder, any shares owned by them or acquired by them in the divorce must be offered for sale to a buyer for a set price. The Buy/Sell Agreement will often determine the method for valuing or appraising the business to determine that price at the time of the buy-out.
When forming a company with a co-owner, entry into a Buy/Sell Agreement can be made a mandatory requirement of the formation of your business. Creating a Buy/Sell Agreement provides a level of protection for all owners of a business. Establishment of a Buy/Sell Agreement early on in a business relationship can help avoid conflict – negotiate early before you are a multi-million dollar company. Early negotiations ensure consistency throughout the business and avoid conflict. However, as your company grows and circumstances change, your agreement should be periodically reviewed to ensure that it continues to meet your needs.
