When people organize and start businesses (LLCs, corporations, partnerships) , some thought should be given to how the owners can or must exit the business. Oftentimes, a “Buy-Sell Agreement” can be a useful tool in defining the rights and obligations of owners pertaining to exit strategies.
What Exactly is a Buy-Sell Agreement?
A Buy-Sell Agreement is a document that provides for the orderly transfer of ownership interests in a company/partnership/LLC upon the happening of certain events. For example, a Buy-Sell Agreement often states what happens in the event that a co-owner dies or desires to leave the business. A typical buy-sell agreement will include items such as the following:
1) Determination of who must or has the option to purchase the ownership interest
2) The time frame in which the interest must be purchased
3) The valuation method/formula to determine the buy-out price
4) Non-competition agreements by selling owners
5) The funding method for the purchase of the selling interest
A well drafted Buy-Sell Agreement can provide certainty and comfort to owners in a business when an event like a death occurs. However, careful attention needs to be taken in valuing the ownership interest to be purchased. I have seen instances where owners have agreed on a certain price for the business to be valued for purposes of a buy-out in a Buy-Sell Agreement. Then, years go by and the business partners do not revisit that static number they chose for a valuation. The business grows over the years and is worth much more than what the agreed upon value stated. Then, a business owner dies and a surviving spouse is stuck having to sell that interest for a fraction of its value. It is imperative to have a well drafted agreement that is very detailed, as a poorly written Buy-Sell can be much worse than not having one at all. It is recommended to seek out a trusted business lawyer to assist in the drafting of this very important document.About Hopkins & Huebner, P.C. Our Business and Corporate Law attorneys provide comprehensive legal services to individuals, families, entrepreneurs, small businesses, and large corporations. Hopkins & Huebner, P.C. is a full-service law firm with offices in Adel, Des Moines, and the Quad Cities. We have attorneys that are licensed to practice in both Iowa and Illinois. Office hours are 8:00 a.m. to 5:00 p.m. Monday through Friday. Call us today at (515) 244-0111.
Iowa’s Domesticated Animal Activity Statute
Children as Beneficiaries of Life Insurance Policy