How do you have a contingency, and prevent disputes with business partners?
At the beginning of a business relationship, everything is rosy and exciting. There is so much potential, everyone is working hard and on the same page, and (let’s face it) the business is probably not worth much yet. As businesses grow, things change, and contingencies should be in place from day one, just in case.
Having a proper Buy-Sell Agreement, when you are in business with other people, is crucial and goes a long way to managing relationships between partners.
A buy-sell agreement is sometimes in a shareholder agreement or a partnership agreement. Or it can be a stand-alone document.
Basically, it is an agreement that one of the partners will buy the other business partner out of the business if a triggering event occurs. A triggering event could be a dispute that cannot be resolved, a falling out, a serious injury, mental illness, or death. Other events to consider would be bankruptcy, divorce or marriage breakdown, terminal illness, and poor performance.
You need a buy-sell agreement if you are in business with another person, whether it’s a partnership, a company, or a trust.
You need buy-sell agreements for two main reasons:
Firstly, we usually don’t know when a death or traumatic event will occur, and there is often not enough money for the remaining partner to buy out the exiting partner without a degree of financial pain.
Secondly, the remaining partner wants some control over who their partner will be. The original partners are happy to work together, but if one partner dies or exits, you may not want your partners’ wife – who is at all suited to running your business – to be involved in a significant way. You also don’t want the exiting partner to sell their share to someone else that you don’t want to work with.
There are also some other benefits, like dealing with the valuation. If you’ve already agreed on a process of valuation, this can avoid unpleasantness that might come up when buying out the exiting partner.
Some things that must be covered, or at least considered in a buy/sell agreement:
- How the business interest will be valued,
- How the business interest will be transferred,
- How the transfer will be funded,
- Entry and exit of business partners for a variety of reasons.
Basically, the remaining partner will usually want the first option to buy the other half of the business. There will need to be a way to afford this, and there will need to be a way to work out how much is paid. If the exiting party wants to sell to someone else, and the remaining partner doesn’t want to work with this new person, there also needs to be what’s called a tag-along clause. This can force a third party to buy all the shares intend of just the shares of the
There will need to be a way to afford this, and there will need to be a way to work out how much is paid.
If the exiting party wants to sell to someone else, and the remaining partner doesn’t want to work with this new person, there also needs to be what’s called a tag-along clause. This can force a third party to buy all the shares intend of just the shares of the existing partner.
There are a number of ways that you can value your business. You can work out the valuation method upfront so that it won’t be argued about later, and this all gets built into the buy-sell agreement.
Make sure you pick a solicitor who knows about these issues and ask them about their understanding before you engage them, or you could end up with horrible tax consequences due to poor funding, or worse.
About Your Guest Blogger: Jacqui Brauman is the principal solicitor at TBA Law and an Accredited Specialist in Wills and Estate. After beginning in rural public education, Jacqui has achieved a Bachelor of Laws, Bachelor of Accounting, Graduate Diploma in Tax Law, and Masters of Applied Law in Wills and Estates. Her career of over 10 years in the legal industry has taken her from Central Victoria to rural New South Wales, to Sydney, and back to the outskirts of Melbourne. She has written and published two legal books; ‘In Case of Emergency’, and ‘Death and Social Media’, as well as three ebooks for empowering women: ‘Steps to Success for Women’, ‘Acres of Diamonds’ and ‘Graduate the School of Hard Knocks’. She speaks and writes regularly on women’s empowerment throughout Australia. Her blog is at http://www.haveitall.net.au/