One question we are asked often is if a lawyer is needed to create a buy sell agreement. We highly suggest having an attorney review these types of agreements, and there are a few reasons why.
But first let’s talk about these agreements at a high level.
What is a Buy Sell Agreement?
Buy sell agreements are contracts that dictate when co-owners of a business can sell their respective interests in a company. The buy sell agreement also explains who can buy the owner’s interest and the price required.
These types of contracts aren’t in force at all times. They only come into play if an owner dies, gets divorced, becomes disables, is bankrupted or retires. All of these are major life changes that affect the owner’s ability to work and finances. The buy sell agreement helps dictate the next steps.
Because it’s never known when these types of things may happen, it’s recommended to put a buy sell agreement into place ASAP. Every day without one is a day of financial risk to the owners of the company.
Why Should an Attorney Review a Buy Sell Agreement?
The first reason why an attorney should review these types of agreements is simple – it’s a contract. Contracts have been around for a long time, and for good reason- they help protect the interests of both parties. The problem is that a poorly (or cleverly) written contract can contain loopholes that benefit one party more than the other. A lawyer will double-check every word of the document to make sure everything is in order.
Another issue that can happen with contracts is if one party understands it much better than the other. Hiring a lawyer to help answer any questions or address concerns is a good way to mitigate this issue. It helps all of the co-owners of the business feel comfortable and know what the buy sell agreement is holding them to.
A lawyer can also draft the agreement to prevent ownership falling into the wrong hangs. For example a lawyer will know how to draft the agreement to help prevent a former spouse from taking an ownership interest in the company in the event of a divorce from a co-owner. This is important because it doesn’t just affect the co-owner getting divorced – it protects the entire company.
What Can Happen if a Lawyer Doesn’t Help with the Buy Sell Agreement?
This is somewhat of an open-ended question, but here are a few things that could happen if the agreement wasn’t written well.
Former spouse gets a co-owner’s interest – this was referenced earlier, but we wanted to say it again. This is typically bad news for the company because it’s unknown what the spouse will do with their share of a company they didn’t help build.
Company’s value is too low – without a good valuation system in place, the company may be valued and sold off for less than what it’s actually worth. An attorney can help you understand best practice on how to determine the company’s value.
Pay a hefty estate tax – a buy sell agreement can be written in a way that reduces the amount of estate tax paid at the time of your death. A lawyer can help you wordsmith the contract to do so, meaning more money will pass onto your heirs.
Buy sell agreements are vital for businesses with more than one owner. If you have any other questions, give us a call at 714-663-8000. We’d love to review your agreement or help you draft a new one.
Courtesy of Cuselleration