Partners starting a new business together have to negotiate a thorough contract. Partnership agreements may discuss job responsibilities, financial investments and profit-sharing arrangements. They may also need to include buy-sell agreements.
While partners might start the business with the intention of working together indefinitely, circumstances may change with little warning. A buy-sell agreement is critical in cases where the partners find they are no longer aligned regarding the future of the company or when one becomes incapable of continuing to run the business.
What is a buy-sell agreement?
A buy-sell agreement is essentially a contract outlining the terms for one partner to acquire the other’s interest in a shared organization. Buy-sell agreements may impose numerous requirements, such as using a specific valuation method when calculating what the company is worth.
They may impose obligations on the exiting partner to provide transition services. They may also include restrictive covenants to prevent unfair competition. Buy-sell agreements help prevent damaging litigation where partners fight with one another over a proposed buyout.
By establishing terms in advance, the partners make it possible to protect the organization as a whole while balancing each of their interests in a buyout scenario. The terms set in a buy-sell agreement are typically binding once both partners sign, although they only take effect in qualifying circumstances.
Aspiring business owners who have support when creating a business plan and negotiating critical contracts can create documents that effectively protect the organization. Working with a lawyer is often beneficial for those who want to start successful companies and need custom documents for that purpose.