Call Today: (202) 789 - 8898
Posted by: Charles P Myrick CPA Posted on: Feb 25 2021 Posted in: small business, starting a new business, business entities

Buy-Sell Agreements: What Are They and Should My LLC Have One?

What would you do if one of your company’s owners passed away, retired, or otherwise ceased to be an owner? Do you have a documented leadership succession plan or an outlined procedure for legal, financial, and practical actions? Over 70% of businesses would answer that with a “no.” If your company is one of them, your LLC could be headed for chaos.

What is a Buy-Sell Agreement?

A Buy-Sell Agreement is simply a legal document for business owners that outlines procedural actions when an owner ceases involvement or leaves the company or business. It becomes active when an owner dies. Retirement, disability, divorce, or irreconcilable differences which lead to an owner leaving the company could also be the trigger. The critical thing to remember is that the steps taken when an owner leaves are agreed to by all owners and outlined in exact detail ahead of time.

Benefits of Buy-Sell Agreements

There are numerous benefits to drafting and signing a Buy-Sell Agreement:

  • Saves the business – Having an owner die or leave unexpectedly can be more than a small business can handle. If a plan is already in place, it can save a company from surprise legal, tax, or financial trouble and possible failure. 
  • Unity – All parties have agreed ahead of time, so succession and transition to new leadership can be smooth. All parties’ interests are automatically served.
  • Less painful and traumatic – Any situations that trigger this type of agreement can come with emotional impact. Having the understanding made ahead avoids tough deliberations in a difficult time, allowing for cool heads and unemotional choices and the stress of not knowing what may happen.
  • Retain business value – Unforeseen tragedy or drama can seriously undermine a business’s value if a solid transitional plan is not in place. You will ensure a much stronger Confidence Value by preparing ahead of time to replace the leaving partner’s skills or resources. Smooth transitions do a lot to ensure stakeholder and customer confidence.

Tips When Creating a Buy-Sell Agreement 

There are a few things to remember when creating your agreement:

  • Do it early – These agreements aren’t much good unless they are created before they are needed. The actions that require them are usually unexpected. Don’t wait!
  • Valuation of business – Agree on the valuation of the company. This may require some research and discussion with experts on the subject. Over time, re-evaluate and update. 
  • Ground rules – Rules in everything should be detailed and specific, right down to any life or medical insurance, 401K, or other benefit issues for interested parties. Include procedures and expectations for every situation that could trigger the agreement, including disability, divorce, and personal disputes.

Buy-Sell Agreements should be drawn up with help from legal and small business advisors who deal with these issues professionally. Myrick CPA understands how unexpected and sometimes unwelcome circumstances can adversely affect any small business. We can help your company avoid financial pitfalls. Reach out to us for a consultation today