You may be looking forward to a long, healthy relationship with your new business partner – but nothing lasts forever. Eventually, one of you will decide to move on, whether that’s because you ultimately decide on different goals or one of you just wants to retire.
A buy-sell clause is an essential part of your partnership agreement for this very reason.
What’s a buy-sell clause?
Also known as a “buyout” agreement, a buy-sell clause is a provision within a partnership agreement that provides a structured system for the buying and selling of a partner’s interest in the business.
This acts as a safeguard for the company itself, and it also protects each partner’s personal interests against future changes. Here are the top three reasons having one is so important:
- It allows you to handle unforeseen circumstances: Buy-sell agreements are designed to address situations where a partner is unable or unwilling to continue their participation in the business without disrupting all your business operations. The smooth transition of ownership can help keep your company on track despite the changes.
- It prevents unwanted outside ownership: Without a buy-sell agreement, there may be no bounds on who could end up purchasing a departing partner’s interest in your business. That could mean suddenly finding yourself in business with someone you don’t know or don’t like. An effective agreement will keep your business in the right hands.
- It establishes the critical valuation method: One of the biggest concerns of a buy-sell clause is making sure that disputes over the value of a partner’s share are minimized. Your agreement can specify exactly which valuation method (such as asset-based, market-based or income-based) will be used, how an expert will be chosen to do the valuation and more.
In business, uncertainty is never good. You can eliminate some uncertainties with experienced legal guidance.