Do you own a business with one or more other partners? Whether you are a member of a partnership or you share ownership of a limited liability company (LLC) or a corporation, it is crucial that you are prepared for a day when an owner may have to the company with relatively little warning.
A buy-sell agreement is essential for small and mid-sized businesses with multiple owners. In this article, our Cortland business law attorney explains the most important things to know about buy/sell agreements in Ohio.
Buy-Sell Agreement: Defined
Also referred to as ‘buyout agreement’ or as ‘business will’, Investopedia defines a buy-sell agreement as a type of business contract that clarifies how a partner’s shares of the company will be handled if they leave the company in the context of a triggering event.
In other words, a buy-sell agreement is a pre-arranged internal contract that helps to ensure that there is a smooth transition of the business to the next stage if a partner suddenly passes away, becomes disabled, or otherwise needs to exit the company with little warning.
Three Signs You Need a Buy-Sell Agreement for Your Ohio Business
While a buy-sell agreement is not necessary for all business owners, it is an essential legal document for many small and mid-sized companies in Northeast Ohio. Here are three signs that you need a buy-sell agreement for your business:
- Your business has multiple partners with significant ownership interests.
- You and/or your business partners are heavily involved in day-to-day operations.
- Shares for your business are difficult to value on the open market.
How to Set up a Buy-Sell Agreement in Ohio
With buy-sell agreements, it is best to be proactive. You and your partners will want to put a well-structured buy-sell agreement in place as early as possible, ideally when you form the company.
That being said, it is never too late to put a buy-sell agreement in place. So how do you do it? A buy-sell contract should be drafted to meet the unique needs of you, your partners, and your business. Some of the key considerations include:
- Triggering Events and Purchase Rights: Typically, a buy-sell agreement states that the remaining business partners will have the first right (or automatic duty) to purchase the shares of the partner who passed away or otherwise left the business. The agreement should clearly specify the triggering events and the purchase rights.
- Business Valuation and Funding of the Agreement: You need to know the value of your Ohio business when structuring a buy-sell agreement. The contract should declare a value or a process for determining value. Additionally, it is crucial that you and your business partners have a funding structure in place to execute the agreement. Most often, this involves business partners taking out life insurance policies and disability policies on each other—so that they can purchase shares if and when a triggering event occurs.
Call Our Cortland Business Lawyer Today
At The Law Office of John C. Grundy, our Ohio business attorneys have professional skills and legal expertise to negotiate, draft, and review buy/sell agreements. If you have questions about buy/sell contracts, we can help. Call us now for a completely private case review. Our firm represents business owners in Cortland and throughout Northeastern Ohio.