By Emilee Gehling & Isabella Erickson
When you run a business with friends, family, or a business partner, you have a team you know. However, you run the risk that your partner will sell their ownership interest, and the buyer may be someone you don’t know. If the third-party purchases enough ownership interest, they might even become majority owners and, suddenly, you have less of a say in how your business operates.
A buy-sell agreement protects business owners against this exact situation. A buy-sell agreement is a contract where the owners of a business agree not to sell their ownership without giving the other owners the right of first refusal. These agreements typically address other transfer situations as well, such as the divorce, death, or medical incapacity of an owner. The point is to protect the current owners—the people who have built up the business.
An important part of drafting a buy-sell agreement is drafting purchase procedures. A buy-sell agreement will set out the purchase price and payment terms. It may also include life insurance provisions to fund a future buy-out. Co-owners may take out life insurance policies to fund the purchase of an owner’s interest should they pass away. These provisions help the business stay afloat while keeping ownership among the original founders or in the family.
Of course, there are times when everyone wants a sale of ownership to go through. A buy-sell agreement won’t prevent this. It also won’t prevent an owner from getting out of the business if all the owners agree. Rather, it controls how their ownership interests may transfer. By adding this extra layer of protection, small business owners can ensure that their business remains in their family or with people they know and trust, rather than far-off investors who may not share your goals and values.
If you are interested in drafting a buy-sell agreement for your business, contact Gehling Osborn Law Firm, PLC.
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