Do you have a business partner (or more than one)? If so, a buy-sell agreement is vitally important. These agreements outline clear procedures for what happens if a partner dies, retires, or otherwise decides to exit the business. Here’s an in-depth look at the ins and outs of buy-sell agreements for Houston companies.
A buy-sell agreement safeguards your business by establishing procedures for when one partner exits.
What Is a Buy-Sell Agreement?
A buy-sell agreement establishes guidelines for what happens to one partner’s shares of the company when they exit the business. Without such an agreement, it would be possible for an exiting partner to sell their shares to anyone, leaving the remaining partners to work with an unvetted stranger.
However, buy-sell agreements usually do more than just document what happens if someone decides to leave the business voluntarily. Many also specify “trigger” events that compel a partner to sell their interest in the company.
When drafting the contract for a buy-sell agreement, a company’s owners must collaborate on and agree to the terms. Most buy-sell agreements address the following scenarios (among others):
The Death of a Partner
A buy-sell agreement will typically specify that the remaining partners (or the business itself) must purchase the deceased partner’s shares from their heir(s). Doing so can help prevent heated conflicts and other problems.
Many business owners pass their shares of a company on to one or more family members. Most of the time, these individuals have no business experience, no interest in running a business, or both. If they do have an interest, they could upset the dynamic between the remaining partners and potentially have a negative impact on the company as a whole.
Requiring the remaining partners to buy any shares left to an heir can nip these and other issues in the bud. The existing partners can run the company as usual, and the heir receives money instead of a share in the business.
A Partner’s Voluntary Exit
In some cases, a partner may simply wish to retire or leave the business for personal reasons. Having a buy-sell agreement in place ensures that the other owners won’t be stuck with a new and unfamiliar business partner.
Conflict Among Partners
Co-owners of a business tend to work closely together. They generally have an amicable relationship at the start, but business relationships can (and sometimes do) deteriorate over time. Without a solid plan, there’s a good chance that the partners will find themselves facing costly, acrimonious business litigation.
It can be uncomfortable to think about the possibility of a business relationship’s breaking down. Fortunately, having a well-drafted buy-sell agreement can make things much easier for everyone involved in your company.
A Partner’s Bankruptcy
What happens if one partner goes bankrupt? To avoid involving the business in troublesome bankruptcy proceedings, it’s often wise to plan for the other owners to buy out the partner who was forced to declare bankruptcy.
Get started on your company’s buy-sell agreement today. Call The Weisblatt Law Firm, PLLC, at (713) 666-1981 for a free phone consultation.
A Partner’s Divorce
Like bankruptcy, divorce is a legal process that can lead to complications for a business. Instead of risking that a partner’s former spouse could get a share of the company, many businesses stipulate that a divorcing owner must sell their shares.
A Partner’s Disability
Some disabilities won’t necessarily impact a co-owner’s ability to manage the company. However, if a partner develops a major disability that makes it impossible for them to contribute, such as a traumatic brain injury with severe cognitive impairment, it may be best for them to sell their shares.
Types of Buy-Sell Agreements
When many people think of buy-sell agreements, they imagine the remaining partners purchasing the departing partner’s shares. That’s an option, but it’s not the only one. Here are the three most common types of buy-sell agreements:
Cross-Purchase Agreements
A cross-purchase agreement represents the most straightforward approach — it involves the remaining partners’ buying out the departing owner’s shares. This method typically works best in a company with a few owners. The more partners there are, the more complex these agreements become.
Entity-Purchase Agreements
With this option, the business itself (as opposed to its individual partners) buys out the departing owner’s shares, and the departing owner’s interest in the business is retired. This can be a good option if the company has a large number of partners.
Hybrid Agreements
A hybrid agreement involves giving the business entity first rights to purchase the departing owner’s shares. If the business lacks the funds to do so, or the remaining owners decide against it, the other owners then have the option to buy the shares.
Valuing Shares in a Buy-Sell Agreement
A Fair Buy-Sell Agreement Depends on Accurate Share Valuations
Things can quickly become contentious if the partners can’t agree on a reasonable price for the shares in a buy-sell agreement. When creating a buy-sell agreement, it’s therefore critically important to decide how the shares will be valued.
Three of the most common methods are:
- Formula: Uses a predetermined calculation
- Fixed Price: Involves all owners choosing a set price per share
- Process Agreement: Involves an independent appraiser valuing the shares.
A process agreement is often the most prudent course of action. Hiring an independent appraiser helps to keep the process objective; and by valuing the company at the time of one partner’s exit, the partners can ensure that the valuation of shares is as accurate as possible.
However, every business agreement is different. A Houston business attorney can help you and your business partners choose the best valuation method for your arrangement.
Get Skilled Legal Guidance for Your Business Buy-Sell Contract in Houston
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If you own a business with other people, you can’t afford not to have a detailed buy-sell agreement. These agreements can protect your business from unforeseen complications and grant you and your business partners priceless peace of mind.
To ensure that your agreement is both thorough and fully compliant with Texas law, you should consult a qualified business lawyer before drafting it. Attorney Andrew Weisblatt has been practicing business law since 1992, and his extensive and diverse experience enables him to fully understand what business owners need.
Before starting his practice, Mr. Weisblatt served as in-house counsel for a multinational corporation. However, his knowledge isn’t limited to larger businesses — he has also assisted small and medium-sized companies and sole proprietorships.
Whether you’re ready to draft or update your buy-sell agreement or just have questions, The Weisblatt Law Firm, PLLC, is here to assist you. Call (713) 666-1981 today for a free phone consultation.
Attorney Andrew Weisblatt
Mr. Weisblatt has practiced continuously since becoming licensed in 1992 and has represented businesses ranging in size from one person start-up ventures to multi-national corporations employing hundreds of people in multiple countries. From 2005 through 2009 Mr. Weisblatt was in-house counsel and chief operating officer of a multi-national corporation in the steel products industry. That in-house position provided valuable insight into how businesses work and what they actually need from their lawyers – both in-house and outside counsel. Attorney Bio
