What is a buy sell agreement, and why is it vital for businesses in Arizona? Also called a buy/sell or buy and sell agreement, it is a legally binding contract between business partners. It dictates how a portion of a business gets reassigned or sold when one business owner passes away or decides to leave the company. Typically, these contracts also prevent one owner from selling their stock in the company without the consent of other partners invested in the business.
Buy sell agreements are crucial for Arizona business owners. These agreements ensure a smooth transition when one partner exits the business. As an entrepreneur, you pour your blood, sweat, and tears into your company to make it succeed. Without a valid buy-sell agreement, your future and financial stability could hang in the balance when one business partner dies, retires, or leaves the industry.
At Pennington Law, PLLC, we help business owners protect their investments. Our experienced attorneys assist with Arizona business succession planning and can draft a buy and sell agreement that protects your company’s growth and wealth management. Contact us today for a free consultation.
Key Components of Buy-Sell Agreements
Buy-sell agreements are legal contracts that outline how a departing owner can exit the business and what happens to their stake in the company. These agreements are important for every company, whether it is a sole proprietorship, partnership, limited liability company, or closed corporation.
Several key elements of buy-sell agreements help protect all owners involved by creating a contingency plan for certain triggering events. A triggering event occurs upon an owner’s:
- Decision to leave the business
- Permanent incapacitation or disability
- Declaration of bankruptcy
Most buy-sell agreements stipulate that when a partner exits the business for any reason, their share of the business is sold to the company or the remaining business members.
The two most common buy sell agreements include:
- Cross purchase agreement – This arrangement allows remaining owners or business partners to purchase the share of the business that is up for sale. It works best for companies with few owners.
- Entity purchase agreement – This agreement enables the business entity to buy the leaving partner’s share. The business entity then gains ownership of that partner’s ownership interest and retires those shares/ownership interest.
There are also hybrid buy-sell agreements, which combine cross-purchase and entity-purchase agreements. In a hybrid situation, the departing owner offers their share of the business to the business entity. If the entity does not purchase the share, it must be offered to other business owners and partners.
A vital component of drafting an effective buy sell agreement involves calculating the value of the business. All parties want to feel confident they are entering a fair deal. Some of the most common valuation methods for determining the worth of the business include:
- Fixed price
- Formula approach
- Independent appraisal
The type of valuation method used depends on numerous factors, including the business’s life cycle and the industry’s strength. An experienced buy-sell agreement attorney can help you determine the best valuation method for your unique situation.
Finally, the success of a buy sell agreement depends on how business owners arrange the funding method of the buyout. Standard approaches to fund a buy-sell agreement include borrowing, paying cash, getting an installment note, selling assets, using a sinking fund, or using the proceeds of disability insurance or life insurance policies.
Benefits of Buy-Sell Agreements in Arizona
Buy-sell agreements benefit companies in numerous ways and may be the best method for protecting your business’s health and stability. They can ensure business continuity and quality. They can provide an orderly transfer for business partners and offer assurances to existing partners that the company won’t pass to unsuitable new owners. Buy-sell agreements can also protect assets by creating a source of funding that won’t require the company to sell business assets.
A solid buy-sell agreement also benefits a retiring partner or the estate of a partner who passes away. Survivors or designated beneficiaries receive compensation for the owner’s interest in the company. Both sides gain a measure of financial security and stability, and the business can continue running without significant disruption. Clear and defined business succession allows the remaining partners to plan for the future appropriately. Buy sell agreements support long-term wealth management for business owners and growth by keeping business operations stable.
Common Challenges and Solutions With Buy-Sell Agreements
Unfortunately, drafting an Arizona buy-sell agreement can sometimes be challenging when business partners have personal or professional conflicts. One of the most common conflicts arising from buy-sell agreement negotiations involves the valuation of the business. An exiting partner or their surviving family members will want the maximum compensation possible, while remaining business leaders want to maintain the company’s financial stability. Arriving at a fair valuation can lead to disputes.
One solution to this problem involves enlisting the help of a skilled Arizona business succession planning lawyer. An attorney can review the situation and recommend the best method for arriving at a fair valuation for the business. An attorney may also suggest a flexible buy-sell agreement to solve common challenges and disagreements.
The appropriate valuation method depends on what stage of the business life cycle the company is in at the time. The fair market value may be suitable when a new company is still getting its footing and does not expect to experience significant appreciation in the value of its assets. Shifting to an appraisal approach may be more appropriate once the company is more established and has generated enough goodwill.
A knowledgeable attorney can also evaluate the specific legal considerations and tax consequences when drafting a buy-sell agreement. When the future of your company and livelihood is at stake, it’s essential to enlist the help of an experienced attorney to protect your life’s work and legacy.
Role of Pennington Law, PLLC
At Pennington Law, PLLC, we tailor our services and approach to the needs of our clients. Our comprehensive approach to wealth management for business owners can help you protect your business and assets when challenging events occur. If you are considering a buy sell agreement, discuss your situation with an Arizona business succession planning attorney from our law firm.