Do you believe that you are going to live forever? Have you thought of the possibility that you or your partner may someday want to go your separate ways? If you haven't thought of this or have not executed a buy-sell agreement, the future of your company and all that you have built may be in jeopardy.
A buy-sell agreement is a must for any partner or shareholder in a private company. It puts a value on the shares or partnership interest. This agreement takes the place of the market value that is set by a willing buyer and seller in the stock markets.
In a private company there is no impartial auction. At the time of death or divorce of principals, there are negotiations burdened by emotions of the heirs or other principals. The negotiation sessions often become hostile resulting in litigation and a diminution in the value of the business.
A well though out buy-sell agreement is not a guarantee against all challenges amongst the principals. However, such an agreement does provide a way of valuing the shares if one owner wants to sell out. The agreement can also be used to if the value of shares for estate tax purposes.
The case books are replete with cases between heirs who feel that the value set forth in the agreement is not fair and reasonable at the time of the split. As much as the value can be challenged, an agreement suggests the thinking of the principals at a time when cooler heads prevailed and challenges are somewhat softened.
A buy-sell agreement is analogous to a prenuptial contract for business partners. It maps out what happens to shares when one of the partners departs.
Valuing a company is difficult at any time and especially difficult at a future time. The surviving principal has the right to buy out at an agreed price or match an offer from an outsider.
An outsider often does not wish to submit an offer knowing that his offer can be matched by the surviving principal. Also, an investor often is reluctant to be in a minority position for fear that his input will be confined and the majority principal will bleed the company with large salaries or sweetheart side deals.