When you operate a business, you can’t stop planning for the future. Most of the time, that means focusing on the day-to-day operations and growth strategies – but you also need to give thought to a future where you are no longer present.
This is where business succession planning comes into play, and the number one tool you should consider is a buy-sell agreement.
What’s a buy-sell agreement?
A buy-sell agreement is a contract between business partners that outlines how each partner’s share of a business will be reassigned if the partner dies, retires, simply decides to move on or is otherwise incapacitated and unable to continue participating in the business.
Several different types of buy-sell agreements may be used. What’s right for your business might not be right for another. Some common types include:
- Cross-purchase agreements: These basically ensure that each owner has the right to buy out the other’s business interests in the event of their death or incapacity. This kind of agreement may include a predetermined price for the departing partner’s share, or it may just include an agreement on how the business will be valued.
- Redemption agreements: This is an agreement that allows the business entity to buy out the departing owner’s share. Since the shares are sold back to the company, rather than to individual owners, it can make the process simpler – especially if the method of valuation is specified. That can also make it easier on a deceased partner’s estate, since the business interest can be liquidated faster.
- Hybrid agreements: These give the remaining owners “first dibs” on the departing owner’s shares, with a limited acceptance period. If they fail to act, then the business must proceed with the purchase. Some view hybrid agreements as a great way to meet everybody’s wants and needs in the fairest way possible.
If you’re starting to think about business succession, it really can help to get experienced legal guidance. That way, you can explore options that you may not have ever considered.