Whether you intend to go into business with one person whom you have known since college or a group of individuals you met through an investor, you need to protect yourself. You don’t want to commit a huge amount of money and time to create a business, only to have others take advantage of you or trap you at a job that limits your income and personal growth.
For those intending to do business with one or more partners, integrating a buy-sell agreement into the partnership contract and integrating its terms into certain business formation documents can be a smart move. What should you consider when drafting a buy-sell agreement for your new business?
What would you need to move on from the business?
A buy-sell agreement helps protect you if you leave the company in the future. It entitles you to certain compensation for giving up your interest in the company.
You don’t necessarily know where life might take you in four or five years. While you might currently expect to work at this company indefinitely, a better opportunity could arise that takes you away from the business. You might also have health issues that force you to leave.
Establishing what would be a fair and appropriate amount of compensation given the investment you intend to make in business is important, as otherwise you could face a forced buyout that results in a major loss.
What can the business offer while still remaining solvent?
Being appropriately generous when buying out someone else so they can leave the business is important, but it is also important that there are enough assets remaining within the company for it to continue operating.
Withdrawing too much business equity at once might mean that the company slips into the red and may have a hard time recovering, especially when that financial loss comes at the same time as an ownership transition. Essentially, you need to find a way to balance the business’s needs with the need of the business partners who will help make this idea a functional company.
Drafting valid buy-sell agreements and negotiating terms that protect the individuals involved and the business itself will be important for those about to embark on a new business enterprise.
