Written by Diane Smith, Vice President – Commercial Banking
Buy-sell agreements are important because they can be used as a business succession tool, a legal contract, and they establish a buyer or potential buyer of your business — and the condition under which that sale will occur.
Buy-sell agreements especially make sense when the buyer isn’t a member of your family. When selling your business to a family member, your objective might be to make it as seamless as possible for that family member to buy the company and keep it running. While a smooth transition may still be an objective with a non-family purchase, your primary goal selling outside your family might be to get the highest possible price. A buy-sell agreement can help with that and a variety of other objectives:
The most compelling reason to draft a buysell agreement with a nonfamily buyer is the layer of security it provides. Because a buysell agreement is a legal contract, the buyer is bound by contract to purchase your business. Conversely, your buyer knows that you can’t sell to someone else. If either party wants to back out of the agreement for any reason, the other party can elect to have the contract enforced by the court system.
ESTABLISHING BUYER & SALE CONDITIONS
A buy-sell agreement gives you peace of mind as it ensures you have all the important pieces in place, such as who is purchasing your business, and what the conditions are for the sale — specifically, what the trigger is that would prompt the sale. This is especially important in the case of an unplanned trigger event, such as death, longterm disability, a sudden retirement, or a divorce.
A buy-sell agreement can address the common concern that the business may not continue successfully into the new era. It helps creditors view the business more favorably as continuity means loans will still be paid — it contributes positively to the stability of the company. However, make sure you understand all the restrictions of the buy-sell agreement because they might prevent you from pledging your own interest as collateral or could require permission from co-owners. If you can’t pledge your business interest, it could be harder to get a future loan.
AVOIDING A “FIRE SALE”
No business owner wants to be in the position of needing to sell a business quickly for much less than it’s worth. This is especially true of family businesses in which there are no family members who want to purchase. Having an agreement in writing with the non family owner detailing the conditions of the sale, pricing, and financing means a smoother situation for your family if you get sick, become disabled, or pass away. The agreement ensures your family won’t have to launch a lightning-fast search for a buyer or be at a negotiating advantage when they find one — because there’s already assurance that the business will be transferred for a fair price.
FITTING EVERY TYPE & SIZE OF BUSINESS
Because there’s a wide variety of buy-sell agreements, there’s bound to be one that works for the specific situation and terms of your family business. Aspects such as number of owners and size of company may prevent you from having one type of agreement over the other, or may affect the way you set up your agreement, but generally, you’re not prohibited from using a buy-sell agreement. The biggest difference in buy-sell agreements usually has to do with the buyer. The buyer can be a current co-owner or co-owners, an outside third-party, or the company itself.
Transitioning Your Business?
The experts at First Business Bank have helped many clients navigate selling their business outside their family circle. We can help you get started on the financial side and connect you with a foundation of trusted professionals to help you preserve the most value in your business as you complete this transaction.CONTACT US