Protect Your Business with a Buy-Sell Agreement
Article By: Curt Van Auken
When first starting a business partnership, the last thing you want to think about is the possible dissolution of the partnership you just established. But creating a succession buyout plan at the beginning of a partnership will help ensure a smooth transition in case things change and the partnership needs to dissolve. Any current business partners without a buy-sell plan in place should address this as soon as possible to avoid complications in the future.
The future buyout should be documented with a written buy-sell agreement stating how significant events will affect the partnership. To start this process, you will want to find a few experts in their fields. These professionals will tailor your agreement for the best solution for you and your partner. Contact your attorney, accountant, banker, and valuation specialist before you start the buy-sell agreement with your agency partner. If you don't have a preferred specialist in one of these fields, your banker can help you find one.
- Attorney: An attorney will help you draw up the buy-sell agreement document and inform you of the state laws regarding business buyouts.
- Accountant: An accountant will help you prepare the tax documents needed to help determine the value of the seller's interest. They can also aid in tax considerations to structure and minimize taxes after the buy-sell.
- Banker: A banker will help provide the financing structure for the buy-sell. They can provide financial statements you might need and manage your funds throughout the process. A banker can also provide options for financing the buyout with an acquisition loan.
- Valuation Specialist: The valuation specialist will create a fair market value statement for the agreement and make sure the buyout is a good long-term investment for both parties.
The terms of a buy-sell agreement may include the following:
- Definitions - Defining the terms used in agreement.
- Issuance of shares - Lists what must happen before shares are transferred.
- Restrictions on transfers - States that any attempt to transfer shares not in accordance with the agreement will be void.
- Options to purchase upon the occurrence of triggering event - Lists and defines triggering event that may prompt a transfer of shares.
- Mandatory purchases - Instances where shareholders have option and obligation to purchase shares.
- Calls, puts, and other purchase rights - Lists other options and rights to purchase shares.
- Purchase price - Lists terms of value of shares given different circumstances.
- Closing and terms of payments for shares - Lists when closing will occur and how payment will be handled.
- Voting and governance - Terms voting rights and resolution.
- Non-compete and confidentiality - Lists terms of non-compete agreement and confidentiality agreement.
- Marital property interest of a shareholder's spouse - Lists rights of spouse in shares and options to purchase and sell.
- S Corporation status - Lists terms for if a corporation has elected to be taxed under subchapter S of I.R.C. Treasury Regulations.
- Remedies and Arbitration - Lists results of failure to agree to obligations presented.
- Miscellaneous - Can include termination and amendment of agreement.
Creating a buy-sell agreement before the buyout occurs will offer a mutually beneficial solution for both sides and lessen the need for further mediation.
Curt Van Auken is a relationship manager for SFB, a Wisconsin financial institution that specializes in lending to insurance agencies. SFB has helped numerous insurance agents with their banking needs, including acquisitions, partner buyouts, building expansions, and refinancing projects. For more information, contact Curt at cvanauken@sfbank.com or 715.930.7021.
