Why Consider A Buy & Sell Agreement?
When two or more people become business associates, and potentially break up the partnership years later, absent a buy sell agreement that outlines an exit strategy, it could end up in dissolution of the company and hurt all parties involved. It is in the best interest of all parties to anticipate and properly plan. The attorneys at Detroit Real Estate Law has seen several situation that end up as costly court battles. With substantial legal fees and long drawn own dealings could end up businesses to dissolve. A buy sell agreement can be put into place for around $2,500 and save you a lifetime of hassle.
Buy & Sell Agreements With Life Insurance
Many buy sell agreements are funded through life insurance. If “unfunded,” a buy sell agreement can become ineffective in accomplishing the goals that were established.
Detroit Real Estate Law Example:
Two brothers, Dave & Tom, became partners and built a business. Their business flourished and soon they acquired additional businesses together. Over the years, Dave and Tom had families of their own. Suddenly, Dave experienced a heart attack that ended his life. Not only was the family devastated, but also the employee’s of the businesses. This uncertainty in the business created instability, but the company was able to rebound back into business. Fortunately, Dave and Tom had established a buy sell agreement with Detroit Real Estate Law. The companies purchased life insurance on each of their lives, and in the event of death, the life insurance would kick in and buy out the interest of the deceased partner, providing the family liquidity. Tom was able to maintain focus on minimizing the trauma to the business, and proper planning guided his family through this traumatic situation.
Detroit Real Estate Law Example:
Steve & Mary had also built up successful businesses. Steve died at an early age, and the remaining entities of the business ended up in court, when Steve’s wife and Mary could not agree on a value of Steve’s share. The case ended up in agreement to arbitration, and was neither speedy nor cost effective. Mary not only lost her business partner, but also did not have the money to pay Steve’s wife on their agreed value. Steve’s wife was distraught over her loss of husband and income, and subject to a grueling legal battle to obtain her fair share. Mary ended up selling assets in order to pay Steve’s wife 50% of the value. The benefit of a buy sell agreement could have avoided this entire fiasco.
Provision Of A Buy & Sell Agreement
- Determining The Value Of A Company: While somewhat subjective, the value of a company is often litigated due to what the selling party believes their interest is worth. The buyer and sellers are forced to come to a compromise, which often is constructed in court or a well-crafted binding agreement. Typically, companies will develop a formula that accurately reflects the value of the company, in order to determine this amount.
- Russian Roulette: If a partner is not content with their time in the business, and wants to buy out another partner’s interest, the first partner can make an offer for ownership interest. This process can then be reversed, based on how the second partner agrees to the terms. This can work against partners due to the nature of being bought out for initial terms that could have been low. This process forces partners to be as fair as possible with regards to value.