Small business owners often need special struturing to aid them in managing the transfer of the business to their business partners. Business succession planning, of which buy-sell agreements are important tools, require some careful examination to be sure that the business survives the possible crises that can occur when an owner or key employee is suddenly unavailable to the business, often through sickeness or death.
Consider a small business with two owners, each with 50% of the business. They know each other well and are confident in their relationship. But this confidence does not extend to other people who might also know that industry well, nor does it extend even to the owners' family members. At the same time, the business is a large part of the owners' personal assets and their lives.
A Buy-Sell agreement addresses the needs of these owners by allowing them the ability to get out of the business or to sell their stake in the business and obtain a fair value for that stake, while still protecting the other owner by preventing the sale of the business to new partners who do not have the confidence of the current owner.
Essentially, the owners agree that if one of them wants or needs to sell, an agreed mechanism will come into play that will value the business and set in motion the process of selling the business so the selling owner gets a fair share of the business and the remaining owner gets some control over how the business is sold.
Usually, these agreements will say that if an owner dies, becomes disabled, or desires to sell, the other owner or the corporation shall buy the stake of the selling owner. These agreements are typically tied to insurance policies on the lives of the owners such that if one owner dies, the policy will provide the cash necessary to buy that owner's share of the company.
That way, the family of the deceased owner gets the value that the owner built in the company, and the remaining owner gets to have a company that he or she can control without having to deal with a new partner who might not be agreeable with that remaining owner.
As I indicated, these agreements are one part of a larger strategy of the business owners to protect the business, protect their families, and protect their estate. If you are a business owner, be sure to consider these issues as you grow your company.