Top Mistakes On a Buy/Sell Agreement Between Partners

Top Mistakes On a Buy/Sell Agreement Between Partners

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If you have a business with a partner or investors, you need a valid and up-to-date buy/sell agreement. As a business law firm, Cunningham Law helps business owners create all of the documents and agreements that govern their business. Buy/Sell agreements govern what will happen if a partner or investor wants to leave the business. This can occur for business reasons, because of differences between the owners, due to health reasons or due to the death of one of the principals.

In Las Vegas, we strongly recommend having a business attorney draft or review any agreements that govern your business. Specifically, we recommend having a full discussion with an experienced business law attorney. This will ensure you have a full understanding of what you are and are not agreeing to and getting. When it comes to buy/sell agreements, here are the top 5 mistakes.

Number 5 Buy/Sell Agreement Mistakes

Not Having a Buy/Sell Agreement

Any co-owned business needs to have a strategy if an owner decides to leave. Also called a buyout agreement, this agreement spells out what will happen should ownership need to change.

The mistake is that business owners fail to create a Buy/Sell OR they rely on a standard agreement that was created when the business was formed. This creates a major but avoidable issue for the owners at the time of a potential sale.

Number 4 Buy/Sell Mistake

Not Tying your Business Agreement to Participation or Investment.

Each partner in a business assumes their role, either as an active participation or as an investor. In the event one partner reduces participation, their payout should decrease accordingly.  Tying participation to the buy/sell means that partners are either fully engaged or not able to demand the same amount for their share of the venture.

The mistake is that a partner may request or realize a share of the business that is out of proportion to their contribution.

Number 3 Biggest Buy/Sell Mistake

Not Including Disability Insurance

It is far more common that a business partner become disabled than to pass away. By including disability insurance, in the event of a disability the Buy/Sell would be triggered AND at least partially funded by the insurance.

The mistake is that a disabled partner would be unable or less able to participate in the business. Without this protection, the sale of the business or the entire venture itself can be put at risk.

Number 2 Biggest Buy/Sell Mistake

Not Funding the Agreement OR Allowing Time for Payment to Be Made

The value of the business may be such that a full buyout is not possible in a short time. The assets of a business can be extensive. By funding the agreement OR allowing a time period for a buyout, it can make the sale possible. A proper buy/sell agreement addresses this issue.

The mistake is that a buy/Sell agreement that does not address the funding or funding time frame is likely to jeopardize the buyout or even the business itself.

Number 1 Biggest Buy/Sell Mistake

Valuing Your Business at a Fixed Amount

Your buy/sell agreement should include a formula that indicates the method that will be used to value the business.  It is an error to assign a fixed value to the business or to assign the value based on a moment in time. The true value of the business rises and falls over time and the Buy/Sell Agreement must reflect this.

The mistake is not specifying a proper method of valuing the business in the buy/sell agreements. Agreements that do not address this point will likely cause a major issue at the moment the business is in transition.

Contact Us To Discuss Your Business

There are many more mistakes business owners make in their buy/sell, or buyout agreements. Be sure to avoid these mistakes by having a knowledgeable business law attorney review your documents, or draft them for your business. In Las Vegas that’s the team at Cunningham Law.