As I’ve worked through an abundance of family ownership transition projects over the past few months, one item has surfaced that is often underappreciated – the company’s buy-sell agreement. So, I’m here to give some very belated Valentine’s Day love to this often misunderstood, underutilized – but vital – business document.
When embarking on a family transition, much of the effort involves the planning and structuring of the mechanics for the change in ownership. While this is certainly necessary to execute the transaction, it is not the only consideration. In order to set your family business up for long-term success, you also need to determine what will happen after settlement. This is where the buy-sell agreement plays such a crucial role.
A well-thought out buy-sell agreement outlines the parameters for how the ownership will be handled in the event of a variety of triggering circumstances. These circumstances range from planned events such as retirement to unplanned events such as death. Without this guidance, the owners are left to navigate a situation that is extremely likely to involve a barrage of emotionally charged factors, particularly in the event of death, disability, unplanned termination, divorce, or bankruptcy.
A buy-sell agreement also offers a way to tie in the family’s intentions and values. For instance, we often see a family business insert a notification provision for owners who decide to leave the business. It is not uncommon for the agreement to require a one-year notification clause to allow enough time to identify, train, and/or hire a replacement. We have also seen agreements that impose a discount on the shares for family members who are not willing to stay and work in the business.
While some provisions of a buy-sell agreement will be unique to each business and family, the common factor is that the agreement plays an important role in fulfilling the family’s ideals and objectives. In a time of need, a well-drafted buy-sell agreement will address these circumstances and offer you and your family piece of mind.
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