Why a Simple Buy-Sell Agreement Ain’t So Simple

Posted on October 14, 2013 in Business Partners, Planning & Advisors

The portion of a partnership agreement that’s often referred to as a “buy-sell” agreement, can really help simplify matters if a business partner dies or becomes disabled.  But is it really “the simple solution,” as Robert Cavanaugh seems to indicate in his blogpost?  I would argue “not quite.”  Buy-sell provisions have to be addressed carefully for the following reasons:

  • Most buy-sell agreements tend to cover only what happens in the event of (1) death, (2) disability, or (3) a partner’s wanting to leave the business.  Many of them don’t address (1) divorce of a business partner (another way to encounter the unpleasant surprise of being in business with your partner’s spouse), (2) deadlocks (where you want to kick someone out), or (3) a tantalizing third-party offer to purchase.
  • Death and disability buyouts can be funded with insurance.  The majority of the other situations — a partner has a lifestyle change and wants to leave or be bought out of any other reason — cannot.  This means that you ( or the company) has to come up with the cash . . . somehow.
  • Even with a buy-sell agreement, there isn’t a ready market for ownership.  Most owners wouldn’t want “just anyone” coming in off the street to become an owner.  Buy-sell agreement often have extremely tight restrictions on who can become an owner and the extent to which the other current owners have to agree to the new addition.

Finally, buy-sell provisions aren’t the only provisions that need to be included in your partnership agreements.  There are a number of others having to do with the management of the business and the ways that money will be distributed outside of the buy-sell situation — all of which can tie you up in knots if you haven’t addressed them thoroughly.

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