Why Every Closely Held Company Needs a Buy-Sell Agreement

You and your partners have poured years of blood, sweat, and tears into building your closely held business. It’s thriving, and the future looks bright. But what happens if one of you decides to leave, becomes disabled, or passes away unexpectedly? Without a plan in place, this unforeseen event could throw your business into disarray.

This is where a buy-sell agreement comes in. It is a legally binding document that outlines the process for transferring ownership or shares within your company when a co-owner is no longer able or willing to participate. Think of it as a roadmap for avoiding a potentially disruptive situation, ensuring a smooth transition and protecting your business’s longevity.

The following are advantages that make a buy-sell agreement essential for any closely held business:

• Exit strategy — Life throws curveballs. A partner might move away, want to pursue other ventures, or simply retire. A buy-sell agreement removes the uncertainty surrounding their share. It clearly defines who has the right to buy the departing owner’s interest, preventing confusion and potential legal battles.
• Fair valuation — Determining the value of a closely held business can be contentious. A buy-sell agreement eliminates this hassle by establishing a pre-determined valuation method for ownership stakes. This could be a fixed price, a formula based on company performance or an appraisal process, all agreed upon by the partners beforehand.
• Controlling ownership — Without a buy-sell agreement, a departing owner can potentially sell their share to anyone. This might introduce an outsider whose values or goals don’t align with the existing partners. A buy-sell agreement can give the remaining owners a “right of first refusal,” allowing them to purchase the departing owner’s share before it goes to someone else.
• Business continuity — Losing a partner can disrupt operations. A buy-sell agreement ensures a smooth transition by outlining the steps for buying out the departing owner’s interest. This minimizes disruption and allows the remaining partners to maintain business continuity with minimal hiccups.
• Avoiding legal nightmares — Disagreements over ownership can lead to costly and time-consuming legal battles. A buy-sell agreement acts as a pre-emptive measure, outlining a clear process for resolving ownership issues. This can save your business from the financial and emotional strain of litigation.
• Funding the buyout — The financial burden of buying out a departing partner can be significant. A buy-sell agreement can incorporate life insurance policies on each owner. In the event of a death, the life insurance proceeds would provide the necessary funds for the remaining partners to purchase the deceased owner’s share.

By proactively establishing a buy-sell agreement, you safeguard your business from unforeseen circumstances. This highlights the importance of seeking professional guidance. An experienced Phoenix business lawyer can draft a comprehensive buy-sell agreement tailored to your unique needs. This helps ensure your business assets are protected while you cope with the transition of a partner’s departure. 

At Law Offices of Donald W. Hudspeth P.C., our Phoenix business attorneys draft reliable buy-sell agreements for companies throughout Arizona. Call us at 866-696-2033 or contact us online to set up a consultation.