Buy/Sell Agreements: A Business Essential

If you own a business – any business, including especially a family business – a succession plan, including specifically, buy/sell agreements, are an absolute necessity.

For many years, three accountants – a man in his 70s who founded the practice, a woman in her 60s and a “junior” partner in his late 30s – owned and operated a busy tax and accounting firm together. The business did reasonably well and the partners shared complementary philosophies about tax matters, billing rates and other important issues regarding the business.

Then, unexpectedly, the founding partner died. The surviving partners struggled to regroup and manage their sudden heavy workload. In the meantime, the founding partner’s wife, also a CPA, appeared, and inserted herself – and her views – into the day-to-day operations of the practice.

What ultimately unfolded – chaos, infighting, power struggles – continued to escalate for many months, with the surviving partners attempting to carry on as before, while facing daily challenges on everything from billing to scheduling to personnel as well as dealing with constant “input” from their former partner’s wife.

In the end, with the principals unable to agree on the simplest of decisions, the practice closed its doors and the two surviving partners left for other firms. The legal battles over the former firm’s clients, debts and files continue to this day.

Buy/sell agreements are legal contracts that outline what will occur in the event that one party dies, wants to leave the business, becomes disabled or faces another “triggering event.” Without such an agreement, uncertainty abounds, and the ownership rights can be left to chance and may spell the end of an otherwise formerly successful business venture.

A common type of buy/sell agreement is a cross-purchase, which specifies that if one partner’s circumstances dramatically change, the other(s) can buy his/her share of the business. A redemption type of agreement specifies that the business itself makes the purchase. A “hybrid” often combines the two other forms and typically offers more flexibility. As a part of the buy/sell agreement process, a value is assigned to the business, either by appraisal or via an agreed-upon formula. Life insurance policies are usually taken out for each partner as they can help ensure that sufficient funds will be available when the buyout becomes necessary.

Buy/sell agreements often vary widely based on the type of business and can be quite flexible in their structure. An experienced business or tax attorney can offer guidance and draft a document that will protect both family members and the business itself. For questions about any aspect of buy/sell agreements, please contact John J. McAneney, Esquire, at Timoney Knox, LLP.