What happens if a founder/shareholder/owner/partner dies or leaves your company?
Can a crisis be made worse by a clumsy, unplanned leadership succession?
A buy-sell agreement is essential, just like a captain on a ship. No one can absolutely assure that a ship will stay afloat during a storm, but the captain has that job. It is essential to assure that the captain is in command of the ship at all times (because a storm can arise at all times). For the remaining active owners and their business to have a good chance of making it through an owner's a death or other unplanned departure, a buy-sell agreement lays out in advance who is in charge.
- Accordingly, a business owner should always use a buy-sell contract along with an estate plan. Just as the assets of the estate are ideally never left in a legal limbo like probate, a business owner should prescribe who is in control upon such owner's eventual death and what then should happen immediately.
- Business management continuity begins when you originally establish the ownership interests in the first place, which is absolutely the best time to establish what occurs on a future ownership change because that is when the ownership rights are themselves defined or limited. Despite a complete change of ownership, with sufficient forethought and preparation the business management continuity can be achieved or preserved.
- A buy-sell agreement often gets the parties to set out an agreed upon price or valuation method in advance, which sometimes creates motivation for shareholders similar to a pseudo-market for the ownership interest. Further, the buy-sell agreement can set a departing shareholder’s valuation for purposes of mandatory redemptions or specified mandatory liquidity events so that a buyout can be a frendly occasion and free of disputes.
- The terms of a buy-sell can be tailored to a variety of situations, opportunities or requirements.