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Only on SkinInc.com: The Financial Contract Every Practice Must Have

Posted: July 13, 2011

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There are various types of buy-sell agreements that will be discussed below. Nonetheless, there are some basics regarding all buy-sell agreements that can apply to any type of business, specifically the benefit that different stakeholders can gain when one is in place. Buy-sells can be used for corporations (both S and C corporations), partnerships, limited partnerships, limited liability companies (LLC) and other forms as well. For these discussions, the words “business owner” will be used generically to mean any type of business owner (i.e., shareholder in a corporation, partner in a partnership, member in a LLC, and so on).

A. Benefits to the business and remaining owners. From the standpoint of the business and remaining partners, a properly planned buy-sell agreement will provide the orderly continuation of the ownership and control of the business upon the happening of certain events, including:

  • A death or disability of any owner,
  • The desire of any owner to sell her ownership share,
  • Divorce of any owner, or
  • Bankruptcy of any owner, or other situation where creditors may have rights to ownership.

The buy-sell agreement can prevent unwanted outsiders from becoming owners and eliminate the need for negotiation with surviving spouses and children. The agreement may also perform the role of a succession plan, providing for continuity or orderly succession of business management. Furthermore, as discussed below, the buy-sell agreement is often used in conjunction with life and disability insurance policies to effectively provide liquidity for the business to purchase outstanding ownership interests.

This in effect guarantees that the remaining owners will continue to control the business and be able to participate in the future growth of the business while also preventing a competitor from purchasing ownership interests from a retired, disabled or deceased owner, or their families. This guarantees continuity of management in the business, which makes the business more attractive to customers, creditors and employees alike.

B. Benefits to each owner. From the standpoint of a living business owner, the agreement can provide the individual partner with an opportunity to negotiate and obtain the fairest and best price for his or her share of the business. Furthermore, in the case of retirement or disability, the agreement can be a source of additional funds for each owner.