Partnership agreements (also known as Buy-Sell Agreements) are like prenuptial agreements for people that are in business together. The formation of any business with multiple owners should include a buy-sell agreement. Why? Because reality dictates that it is not a matter of IF your partnership will end, but rather WHEN your partnership will end. Unfortunately the buy-sell is an agreement that is often neglected by business people because they want to save on initial start-up costs or falsely believe there is no need because the partner is a “friend” or “family member”. As a fellow business lawyer says, “As with prenuptial agreements, people tend to overlook the importance of buy-sell agreements or simply don’t want to deal with the subject; after all, they are in love!”
What are effective buy-sell agreements designed to accomplish? An effective buy-sell agreement covers how an owner can sell his ownership interest and how that ownership interest is valued. Further, an effective buy-sell agreement sets forth what happens in the event of an owner’s death, disability, retirement, termination, divorce, bankruptcy or other considerations. These agreements will also generally require a right of first refusal. This means if one owner finds an outside buyer for his interest the owner must first offer those same terms to the existing owners. This protects the owners from suddenly running the business with someone they did not intend to have as a partner.
When should you enter into a buy-sell agreement? The time to enter into a buy-sell agreement is at the beginning of the business relationship when everyone is excited and getting along well. Dealing with the buy-sell agreement in the beginning helps to prevent the unenviable position of negotiating under difficult circumstances with former friend, their families and their estates. It is often difficult to negotiate a deal when something has gone wrong and people are upset. Without a buy-sell agreement negotiated in the beginning, owners may end up in court and the business may suffer. The costs of litigating a business dispute can easily run in excess of $100,000 per side while the buy-sell agreement usually costs less than a few thousand dollars. Unquestionably most business owners would rather concentrate on running their business than spending time in court.