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A buy-sell agreement provides direction to owners and other stakeholders in situations when the transition of an ownership interest in a business is in question -- situations such as…
Death or permanent disability
Voluntary lifetime exit
Involuntary lifetime exit
Divorce or bankruptcy
Following is an example of how it’s supposed to work… Let’s say that ACME Digital Marketing is owned by 4 founding partners… Sarah, John, Jim, and Susan.
They started their business 20 years ago and did put a B/S Agreement in place and have been diligent in reviewing it each year.
Sarah decides she wants to leave the business and retire at the end of 2020.
o All the current conversations regarding Sarah’s wish to leave are going quite well because the B/S Agreement clearly outlines how that is to happen… including how the business is to be valued, and the terms of the payout.
Two years ago, Jim suddenly died of a heart attack, and with a stock redemption plan along with the method of valuation and funding clearly described in the Buy-Sell Agreement everything went very smoothly.
So, the purpose of a buy-sell agreement is to address all trigger events of a transfer of ownership. A primary benefit of having this agreement is to avoid having to make decisions that could lead to disagreements at an inopportune time.
