Business Succession Planning & Buy-Sell Agreements
Northern Virginia Business Attorney
Dominion advises closely-held businesses and entrepreneurs in the Washington, DC metropolitan area and throughout Virginia. Business attorney David Knasel has substantial experience in preparing and implementing buy-sell agreements, shareholder agreements, and LLC operating agreements. A properly structured agreement among the founders or owners of a business venture is a critical piece of the business plan. By addressing critical transitions and issues in advance, a buy-sell agreement can save business owners considerable aggravation and money.
What is a “buy-sell agreement”?
A “buy-sell agreement” is a contract between the co-owners of a business to buy or sell their respective interests in the business under certain defined circumstances. These circumstances may include:
- the death of an owner,
- the withdrawal or retirement of an owner from the business,
- an owner becoming disabled,
- a desire or attempt to sell an interest in the business,
- a desire or attempt to add a new owner to the business, or
- a deadlock among the owners.
The price and terms of the sale under each contingency are normally provided in the “buy-sell agreement.”
What is the difference between a “buy-sell agreement” and a “shareholder agreement” or an “LLC operating agreement”?
Buy-sell provisions may be incorporated into either a shareholder agreement or an LLC operating agreement. A “shareholder agreement” is an agreement among the shareholders of a corporation governing various aspects of the control and management of the corporation and the rights and obligations of the shareholders. An “operating agreement” is an agreement among the members of an LLC governing various aspects of the control and management of the LLC and the rights and obligations of the members. These agreements typically restrict the conditions under which an owner may sell his interest in the business.
Why is it important to have a “buy-sell agreement”?
A buy-sell agreement is a critical component of a business’s strategic plan, as well as the owners’ estate plans. It can help accomplish important goals, including:
- assuring that ownership of the business is limited to the founders or an agreed-upon group (e.g., a family);
- providing a means for a business interest to be liquidated in the event of a death or other significant event, generating much needed cash for the family of the affected owner; and
- facilitating the resolution of deadlocks or other disagreements in the management of the business, by allowing one owner to be bought out.
Buy-sell agreements may also be useful in maintaining S-corporation status, tax planning, and restricting a former owner from competing with the business.