A buy-sell agreement is a prenup for your company

When you and your spouse got married, you signed a prenuptial agreement. You hoped the marriage would last, but you were realistic. You knew it may end in divorce, and you wanted to make sure you protected your own assets and interests. It was easier to agree on things while you were still on good terms, rather than waiting for the divorce.

Company concerns

You may have many of the same concerns if you’re starting a company. For instance, you may wonder what will happen if:

  • Your business partner is disabled or seriously injured.
  • Your business partner unexpectedly passes away.

This is a bit different than your prenup, which you obviously geared around divorce, and your agreement may address that as well. What do you do if your business partner wants out or wants to sell? But you also have to specifically address what happens when an accident or an unforeseen event removes your partner from the company.

The problem is this: Your partner’s ownership share is part of his or her estate. Do you really want it to pass along to your partner’s spouse or children? You didn’t start this company to work with them.

However, getting control can become complicated without a buy-sell agreement. They may not want to give up control. If they’re willing to, they’ll want you to buy out your partner’s percentage of the company. If it’s worth $600,000 and you both own 50 percent, that means you have to come up with $300,000 to buy out your partner and retain control of your own business.

Do you have that type of disposable cash sitting around? Many people don’t. The buy-sell agreement can make plans for the company and spell out exactly what should happen, protecting you and your business from financial ruin.

Avoiding conflict

Like a prenup, the buy-sell can also help you avoid conflict. For instance:

  • You and your partner may disagree on the value. If you think the company is worth $600,000 and your partner thinks it’s worth $900,000, it’s hard to agree on that buyout price. The buy-sell agreement can determine how the valuation will get done.
  • You may want to use a payment plan so you don’t have to buy your partner out all at once. Your partner, or his or her family, may want all the money up front. The buy-sell agreement can set up the proper plan in advance so that keeping the company is affordable.

These are just a few examples, but you can imagine how hard it is to divide a company without a prior agreement in place. This is especially true when dealing with a partner’s estate, as his or her heirs may not have the same relationship with you. It’s important to know what legal steps you can take in advance.

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