Understanding Buy-Sell Agreements

What is a Buy and Sell Agreement?

A buy and sell agreement ensures the ownership and continuity of a business after a partner’s or equity owner’s departure. A New York business planning attorney can help you prepare a buy and sell agreement that is specifically customized and right for you and your business.

A buy and sell agreement is a legally binding contract that spells out how and to whom a departing owner’s shares will be transferred. Buy and sell agreements prevent a business owner from selling his or her interest to an outsider without the permission of the other co-owners.

No one knows what tomorrow may bring. Is your own business prepared for the departure of a co-owner? Any business that is owned by two or more persons should have a carefully worded buy and sell agreement in place from the beginning of the business – or as quickly as possible.

Do You Need a Buy and Sell Agreement?

You should have a buy and sell agreement prepared by an attorney for several important reasons. For example, at some point in the future, one of your company’s owners will leave, and in order to protect your interest in the company, you need to have a plan for dealing with that departure.

Without a buy and sell plan, an owner who leaves could liquidate the business if you can’t meet his or her buyout price. And if you are the owner who is departing, your years of hard work and investment could be forfeited if you do not have the right buy and sell agreement in place.

A buy and sell agreement details an owner’s responsibilities and rights when an ownership transition happens. To keep the business operating and to avoid potential legal disputes, your company should have a buy-sell agreement prepared by a New York business planning lawyer

What Does a Buy and Sell Agreement Provide?

A properly prepared buy and sell agreement can determine how and when an owner may ask his or her co-owners for a buyout, when a buyout is required, how to value the company and each owner’s interest, who may become an owner, and the options for funding future buyouts.

No business can survive very long without capable and active ownership. While the details of each buy and sell agreement are unique, a New York business planning attorney can prepare a buy and sell agreement that assures:

1.  Continuity of the business: If you should pass away, retire, or become incapacitated, your buy and sell agreement can ensure that your business will continue.
2.  Proper compensation: A buy and sell agreement can ensure that a designated successor will be compensated properly for a deceased owner’s interest.
3.  Protection of assets: If an owner leaves, a buy and sell agreement can create a source of funding and liquidity, mitigating any need to sell assets.
4.  Protection of the business: Remaining co-owners can know that the decedent’s business share will not be transferred to someone considered unsuitable for co-ownership.

Are There Different Types of Buy and Sell Agreements?

There are three distinct types of buy and sell agreements:

1.  With a “cross-purchase” agreement, departing owners agree to sell their interest in the business to the remaining co-owners. Cross-purchase agreements work well for small businesses, but an “entity-purchase” agreement is more suitable for larger companies.
2.  With an entity-purchase buy and sell agreement, a departing owner sells his or her interest to the entity, which then retires the interest.
3.  With a “hybrid” buy and sell agreement, a departing owner first must offer his or her interest to the entity, but if the entity cannot or chooses not to buy the interest, it must then be offered to the other co-owners.

How Will Buying Be Funded?

Your company’s buy and sell agreement may be as flexible as you and the other co-owners of the company desire. For example, the buy and sell agreement may require different methods of fixing the purchase price depending on the situation that triggers the sale.

A buy and sell agreement should also provide instructions for funding to ensure that other co-owners can buy out a co-owner who exits from the business. Funding methods include:

1. borrowing
2. cash
3. an installment note
4. disability insurance or life insurance
5. selling assets

When they determine a funding method, co-owners should take into account the structure of the business, their ownership percentages and tax brackets, and the ages of each of the co-owners.

Are You a Sole Proprietor?

If you are the sole owner of a business, you should put in place a business succession plan that names the next owner or provides directions for the sale of the business to a family member, to one or more employees, or to a third party – when that time comes.

If your intention is to sell your sole proprietorship, your succession plan must also spell out your company’s operating procedures. Whatever your intentions may be for your business, a New York business planning lawyer can help you create the right succession plan or buy and sell plan.

Where Can You Find Reliable Planning Guidance and Advice?

If you’ve spent a lifetime building your business, there’s no reason it shouldn’t continue to prosper after you’re gone. A buy and sell agreement or a succession plan boosts the likelihood of success and lets you decide what happens to your company or your co-ownership of a company.

Whatever your plans are for your business, you will need reliable legal advice and services. In this state, creating the right succession plan or the right buy and sell agreement requires a New York attorney who has considerable business planning and estate planning experience.

Put an Award-Winning Team to Work for You

Our award-winning legal team at the Law Offices of Vlad Portnoy provides comprehensive business planning and estate planning services to our clients throughout New York and New Jersey.

We help our valued clients protect their families, assets, and businesses. You can prepare for the future with confidence knowing that your interests are being handled with care and will remain secure even after your death or in the event that you become incapacitated.

Learn more about our business planning and estate planning services – or begin the planning process now – by calling the Law Offices of Vlad Portnoy at 516-518-8586 and scheduling your first legal consultation with us. Our legal team knows how to protect what’s important to you.