Many businesses that are owned and managed by multiple partners or family members do not have a plan in place should certain triggering events occur such as death or divorce. It is important to have a contingency plan to ensure a smooth transition at little or no expense to the existing owners.
What is a buy and sell agreement?
Think of it similar to a Will, but for a business. Essentially, it is a binding agreement between the owners or principals of the business (no matter the entity type) that determines what will happen in the event that a partner passes way, is held up in a divorce, files for bankruptcy or leaves the firm.
Many buy and sell agreements contain an insurance component which guarantees that in the event a partner is no longer with us, the other partner(s) will have the cash value to purchase the other share of the business. The clauses in the buy and sell agreements will dictate the outcome. This is why it is particularly important for all parties involved to pay close attention to every detail in the agreement. (more…)