After reading our post on partnership agreements, you might have thought that everything you and your partners needed to hash out was taken care of. Unfortunately, there is one more key item that needs to be addressed. While it might not affect your business for a very long time, setting up a buy-sell agreement is vital for you and your partners.
A buy-sell agreement can be included in a partnership agreement, but is usually a separate document. This document establishes the course of action should one of the partners leave the business for any reason. In most cases, the agreement requires that the remaining partner or partners buy out the partner who is leaving. The agreement also deals with the valuation of the interest, whether a fixed amount or a variable amount and whether based on book value or on a multiplier of EBITDA or some other factor. Also, the agreement occasionally has a different formula used depending on the circumstances of the separation, whether for voluntary reasons such as retiring or moving out of the area or whether for cause arising from a bankruptcy or conviction of a crime or for involuntary reasons such as permanent disability or death.
Loss of a Partner
In the case of a partner’s death, the buy-sell agreement is used to determine how that person’s shares are dealt with. Without an agreement you may end up with the deceased partner’s spouse or heirs as your new business partner. In order to provide the cash to fund a buy-sell agreement, many companies purchase key-man life insurance on the other partner. If the partner dies, the life insurance proceeds can be used to purchase the ownership interest which will avoid the need for any out-of-pocket cash. This will also prevent the spouse or heirs from being involved if that is not desired.
Contact The Law Offices of Kirk Halpin & Associates, P.A. Today
Practicing together in Howard County since 2004 – first in Columbia and now in Clarksville, The Law Offices of Kirk Halpin & Associates, P.A., is here to help with a variety of business, real estate and finance law issues. We have a long list of practice areas, a long list of industries served, and a long list of success stories and recommendations in helping businesses, no matter the size, grow, reach their goals, and surpass them. If you’re seeking counsel on a business, real estate or finance law issue, always feel free to contact us via our contact page or call us at (410) 531-1700. While you are here, remember to follow us on Facebook, Twitter, Google+, and LinkedIn to stay up to date with our blog and the latest happenings at our firm.