Life happens to everyone…even business owners. Running a business is a challenge and requires pinpoint accuracy in several areas to keep it profitable. Often there isn’t much margin for error and if something unexpected comes up it can take a business down. If you are operating on this basis, you are adding excessive and undue RISK to you and your business. But you don’t have to if you have planned to minimize your risks up front.
Life Happens…are you Prepared?
Business owners get divorced, face unexpected deaths, have disabling accidents or health issues, go into retirement, or simply have an irreconcilable difference with another owner of the company. These are just some of the “unforeseen circumstances” that can dramatically affect the life of a business. And with some of these, it can take a business down in a short amount of time. This is HIGH RISK and we encourage every business owner to put plans in place to minimize or eliminate this business risk.
These “bad events” could happen…but they need not have a major impact on your business or increase your risk. One such strategy and documents to have in place is creating an effective “Buy-Sell Agreement” with your partners/owners. With a Buy-Sell Agreement in place, your RISK CAN BE MINIMIZED or even eliminated.
What Exactly is a Buy-Sell Agreement?
In basic terms, a Buy-Sell Agreement is “a legally binding agreement between co-owners of a business that controls what happens if a co-owner leaves the business.”
Why Does a Buy-Sell Agreement Lower Your Risk?
Risk is always increased when there are “unexpected” events looming on the horizon. When a business hasn’t planned for the unexpected they are absorbing more risk. The more unplanned events that could occur increases the risk level for a business. For example, if you had only one area where something unexpected could happen, say your building security, then your risk would depend on the probability of someone breaking in and doing damage or stealing your merchandise. If the probability of this is low, you would have low risk. But if this happened and it would decimate your business, then the risk would be high.
A Buy-Sell Agreement “pre-plans” for these unexpected events so that when one or more of them occur, you have a plan and an answer to how to handle it. While losing a partner could still cause damage to the business, their ownership interests would at least be addressed. It would help lower, but not eliminate your level of risk. In this situation, lowering your risk has a significant positive effect on your business.
What Should a Buy-Sell Agreement Consider and Include?
We’ve created a CHECKLIST as a starting point for discussing how the owners of a business could handle the situation should one of these issues occur. This checklist can be helpful when discussing business transition. The topics in the CHECKLIST will help you identify the goals, needs, and commitment levels of individual business owners and the goals and needs of the business itself.
Discussing these items with your co-owners either before you go into business (ideal situation) or as soon as possible, if you are already running a business, will help you identify planning opportunities and minimize the risk of future business disruption or, worse, business failure.
How To Get the CHECKLIST for Your Owners To Review
We’ve provided the CHECKLIST for you to DOWNLOAD so you can save it, print it, or forward it to your other owners to review. Simply click on the CHECKLIST and it will open up a PDF document you can review and use in your discussions.
How To Use the Buy-Sell Agreement CHECKLIST
There are 3 primary activities we recommend for every business to take if they want to create an effective (and enforceable) Buy-Sell Agreement. Here are the 3 key areas to focus on as owners of the business…
Spend a few minutes going through the checklist and list of key considerations. If you want to protect your business, you need to have a strategy and Buy-Sell Agreement in place. Give a copy of this CHECKLIST to each business owner. Have them review it on their own and then schedule a “discussion meeting” where you can make sure everyone understands what is in the CHECKLIST.
After this discussion and everyone understands the questions/issues, set up a time where you can actively decide what to do with each question or areas. Decisions need to be made prior to putting any agreements in place. These “decision making sessions” can take several days to work through and get everyone on the same page.
After the decisions have been made, now they can be organized and put into an agreed upon Buy-Sell Agreement. This needs be done by a lawyer to ensure that your true meaning, wishes, and issues are all addressed and put into writing. When this is complete, you have just LOWERED YOUR BUSINESS RISK.
Next steps…What To Do Next
This is where we come into the picture. We help businesses (startup or existing) accomplish all 3 steps listed above. We help organize thinking, facilitate the sessions, document the outcomes with legal agreements, and execute these agreements with all the owners. We help you lower your risk by ensuring all these steps are completed and executed.
If this would be helpful, you can Request a Meeting to discuss the process…no obligation to do anything but you will at least understand the process. If you want your attorney to do it for you, that’s great, they can use our checklist as a guide. We just want you to do it and lower your business risk.