Forming a new business venture can open the door to wonderful opportunities. The honeymoon phase can be exciting, and it’s easy to be focused on the possibilities that lay before you. Too often, however, businesspeople neglect to consider what steps they should take in the event of something unexpected, or catastrophic. One of the more difficult discussions is what to do if one of the owners leaves the business. A Connecticut business lawyer can help you handle this with a buy/sell agreement.
A buy/sell agreement addresses what happens when someone can no longer serve as an owner of the business. It also deals with owners who no longer want to be a part of the business. It is designed to clarify how the business will reallocate its assets and ownership when one of its members leaves.
The buy/sell agreement provides guidelines and rules for all members involved or affected by someone leaving. It allows the business, rather than judges or executors, to say who owns what should this situation arise. Working with a Connecticut business lawyer, all partners can have a say on what exactly happens.
There are numerous reasons why an owner would leave a company and, therefore, why the buy/sell agreement would help. Some of those reasons include:
- One of the partners experiences a divorce. The divorce could result in divisions with respect to the partner’s marital assets, including ownership in the business. This means the partner’s former spouse could suddenly have an interest in the business.
- Death or incapacity of the partner. Without a proper buy/sell arrangement, your business may be complicated by having to deal with the partner’s family members. The partner’s children could then have a stake in your company.
- Termination of employment or business disputes. These can be far more difficult to handle when they actually happen. Having an agreement already in place makes leaving the business easier for everyone.
- The partner retires. The buy/sell ensures the retiring partner receives fair compensation for when he or she leaves.
- Bankruptcy. Filing bankruptcy can get messy very fast for the business, so a proper arrangement addresses this contingency.
- Other reasons the partner wants or needs to leave.
In light of these and other circumstances that can arise, your Connecticut business lawyer may suggest having a buy/sell agreement. The agreement will serve several vital functions, including but not limited to:
- Control how ownership interests (e.g. stocks) are transferred.
- Provide a way of valuing or pricing the departing member’s interest in the company.
- Establish how and in what circumstances the departing member’s share is distributed to the remaining owners.
- Allocate control of the business entity among its owners and managers.
A buy/sell agreement can be set up at any time during the life of the business. But it makes sense to put one in place before any partners leave or issues arise. Connecticut business lawyers recommend establishing the agreement when the business is formed or when a new partner is brought in.
There are two main types of buy/sell agreements your company could adopt. First is the cross-purchase agreement, in which the remaining owners are required to purchase the exiting owner’s interest. Second is the redemption agreement, which requires the business to purchase the departing member’s interest. Your Connecticut business lawyer can discuss the pros and cons of both types of buy/sell arrangements.
Don’t Leave Your Business Vulnerable To Unexpected Changes
No one forms a business thinking that one of the owners will someday leave. A buy/sell agreement acts like a prenuptial in the event one does. With Aeton Law Partners, you can be prepared to handle changes so you can get back to running your business. Call us today to schedule a consultation.