Many people who run a business wonder who will take over as owners or partners if they choose to step down or if a calamity happens and they can no longer serve as part of the business leadership. Failing to have a procedure in place to pass on ownership interest can lead to protracted legal battles and possibly the dissolution of the business.
The legal morass that may occur over succession disputes is why many businesses create buy-sell agreements. As the CPA Journal explains, a strong buy-sell agreement can smooth out a transition and give business owners greater control over who they want to succeed them.
Giving options to buy the business
One way a buy-sell agreement controls owner succession is to provide purchase options to certain parties before anyone else has the chance to make an offer. For instance, a company may provide a specific co-owner or business with an option to buy the ownership interest from one of the owners. The contract may even make it mandatory for one party to buy out the ownership.
Some business owners use buy-sell agreements to set up purchase options for different parties. One way to do so is through a right of first refusal. A business owner may set up an agreement for co-owners or another business to have first refusal rights to purchase his or her ownership interest. If all parties waive their rights to buy, the owner may ask a different party to buy out the interest.
Triggering events to buy ownership
As Forbes explains, a buy-sell agreement should address the events that trigger a buyout of ownership interest. The most common triggering event is when an owner dies. Another triggering event is when an owner decides to exit the company or just retire completely. Also, a car accident or illness could disable a partner and make it impossible for the partner to carry on as an active participant in the company.
A solid buy-sell agreement should address these eventualities as well as other matters such as how to value the interest of a departing owner. It could mean the difference between a protracted battle over succession and a smooth transition from one owner to another.