Buy-Sell Agreement: Why Every Small Business Partnership Needs One

As a business owner with at least one co-owner, you know that there is something special about having a partnership. Working together to solve problems, sharing in both success and failure—the bond you share with your business partner or partners is strong. However, it’s critical to the success of your business that you and your partners understand that your relationship also has legal implications. A buy-sell agreement can help.

Like any relationship, what one person does or does not do affects the other, so having protections in place to shield each partner from the actions or circumstances of the others is a necessity. Here’s what you should know about this important document.

What Is a Buy-Sell Agreement?

Essentially, a buy-sell agreement lays out what happens when a partner needs to sell his or her interest in the partnership. Reasons for one partner to sell range from disagreement with how the other partners run the company to divorce, bankruptcy, retirement, and death. The agreement outlines how the leaving partner’s shares will be divided between the remaining partners.

Why Is Having One Important for Your Partnership?

It’s important to have a buy-sell agreement for a variety of reasons. One reason that your business should have one is that it clearly outlines what happens to the business when different circumstances arise. For instance, if a partner has to declare bankruptcy or has outstanding debt, a buy-sell agreement can stipulate how the business will handle the situation.

How Does It Work?

The language of the contract sets up what are called triggering events. Business partners need to decide what kind of events they want included in their specific buy-sell agreement. For example, common events to include would be disability, divorce, conflict between partners, and bankruptcy and death, as mentioned above:

  • Disability – In the event that a partner becomes disabled or incapacitated and can no longer perform their duties, the other partners can buy out their shares to keep the business running.
  • Divorce – Divorce can be messy. If a partner is going through a divorce, the other partners might decide to buy their shares to keep the business from being used as collateral.
  • Conflict – Even the best of relationships can sour. When conflicts arise they can affect the performance of the business. A buy-sell agreement should stipulate how conflicts will be handled.

No matter how air-tight your agreement is, it’s important to revisit and revise it every three to five years, or when the business experiences drastic change. If you want to protect your partnership, ask an attorney how a buy-sell agreement can help.

Does your partnership need a buy-sell agreement? Call AM Law today for a consultation. 305-441-9530