Buy-Sell Agreements

There’s no such thing as a simple buy-sell agreement. This is because they require you to be thinking about what could happen in a year, or five years, or 10 years, or even 25 years down the road, when you consider how the next generation may be affected.

Discussing buy-sell agreements is actually a clever way to talk about the future of your business with any business partners you may have, because you have to anticipate what might happen. Things like, what if I die, what if you die, what if one of us becomes disabled, do I want to keep the business in my family or could you buy me out, etc. All those things.

This sort of planning requires an element of future thinking and gets people going in the right direction. So, let that be a tip if you’re having trouble engaging family members about the future and doing strategic planning. Bring up the buy-sell agreement because you’ll do an element of strategic planning within the buy-sell.

The majority of small businesses have pretty bad buy-sell agreements, in one form or another. For one thing, you have to make sure to keep your buy-sell agreements up-to-date. For example, if you created a buy-sell agreement with your business partner when you were 45, and now you’re 65, you need to rewrite your agreement. The buy-sell agreement that worked for you at age 45 when your kids are little is not the same buy-sell that would work for you now at age 65 when your kids are grown and they’re working in the business with you.

In this case, let’s look at a business owned by two brothers. At 45, if something happened to brother #1, the other brother would buy him out. That makes a lot of sense. But now they’re 65, and brother #1 has one child in the business. So now if something happens to brother #1, and his son works in the business, why would brother #1 have the other brother buy him out? If that happens, he has just slammed the door on his very own son who’s working there hopefully in a very competent fashion.

You need the buy-sell agreement to say what happens if something happens to you – death, disability, disenchantment, protection from divorce etc. Look at your buy-sell agreement objectively. First off you don’t have one, create one! But even if you have a buy-sell agreement, pull it out. It’s probably been a long time since you wrote it, so you need to look at it objectively and make sure you have the right buyers and the right sellers. Does your agreement only address death, or does it also address things like disability? What if you just want to take a year sabbatical from the business? If you borrow money, does it contemplate things like that, so that the buy-sell agreement allows for equity among owners in a family business?

There’s no such thing as a simple buy-sell agreement, they’re always complicated, they’re always fraught with problems. Pull yours out, take a hard look at it, get with your advisors and make sure you have 21st century buy-sell agreement that reflects the needs of the business today, versus the needs of your business 20 years ago.

Written by RLO Training