Successful business owners know that many of the steps you take at the very beginning are essential to limit future problems arising as the business grows and evolves. These steps include choosing a business entity to protect the business owners’ personal assets and enable the business to expand, a strategic plan to guide the business to success, annual business plans to stay on track, and planning for an ownership change..
The plan addressing ownership change is known as a buy-sell agreement. It functions like a combination of a will and a prenuptial agreement, outlining exactly what happens when one business owner departs the business for any reason. A buy-sell agreement is critically important whenever there’s more than one owner. Much like family disputes may arise in the absence of a will or prenup, business partnerships without a buy-sell agreement are vulnerable to conflict in the event that one of the owners experiences an event, called a ‘triggering event,’ that changes his or her relationship with the business..
Very often, triggering events create conflicts that are more than petty squabbles and can result in undesirable changes to leadership or operations. Therefore, a buy-sell agreement drafted by professionals is an invaluable tool for any construction business owner, and can ensure your Minnesota business survives even in the event that a partner does not. The best time to get a buy-sell agreement is before a triggering event happens, before one partner can accuse others of trying to take advantage.
Below, the team at MNCLS explains how a buy-sell agreement works and why penning this agreement should be one of the first steps when launching a construction business in Minnesota.
What is a Buy-Sell Agreement?
Penned on its own or as part of a larger partnership agreement, a buy-sell agreement determines what will be done in the event that someone can no longer be part of the business, wants to exit the business, or is obligated under a divorce or bankruptcy to give up a part of its ownership of the business. A buy-sell agreement can offer guidance for a number of business decisions, including:
Which events are grounds for a buyout
If a partner’s stake can be bought out
How a partner’s stake will be valued
Without a buy-sell agreement, these key business decisions may be left to the courts — and including a buy-sell agreement ensures your interests (and the interests of your partners) are looked after even in your absence.
Benefits of a Buy-Sell Agreement
Like most professional contracts, an ounce of prevention is worth a pound (or in this case, a ton) of cure. Drafting a buy-sell agreement at the onset of your construction business can prevent headache, heartache, and some hefty fees down the road — and the benefits of a buy-sell agreement cannot be overstated.
Determine Your Worth
One benefit of a buy-sell agreement is that it can establish the fair value of a partner’s shares. Not only does determining the worth of a partnership make life easier in the event that one partner wants to remain in the business after the exit of another; establishing this figure well in advance can also eliminate disagreements around the fairness of a buyout offer when the time comes.
Keep the Business on the Right Path
The exit of a partner from a business can be an operational wrench — but the entrance of a new, unwanted partner can send the entire business off the rails. Without a buy-sell agreement, an exiting partner’s spouse (or basement-living kid) may assume your partner’s former role in the business. A buy-sell agreement, however, will dictate who is allowed to fill this vacancy. Therefore, construction business owners who want to keep their business on the rails and keep unwanted parties out can do so with a buy-sell agreement.
Develop an Exit/Continuity Plan
While a buy-sell agreement comes in handy when one of your business partners leaves the business, it’s also a useful tool in the event that all partners decide to walk away from the business. Breakups are never easy, and setting terms in advance through a buy-sell agreement can limit a messy split down the road.
In the event that one partner leaves the construction business unexpectedly (either on their own accord or through their passing,) a buy-sell agreement can serve as a continuity plan. This prevents the remaining owners from scrambling to steady the ship, outlining the responsibilities of the remaining partners.
Start Your Business Off Right With MNCLS
While any buy-sell agreement is better than no agreement at all, giving your business the best chance at success requires calling in the experts. The team at MNCLS are attorneys, but we’re construction professionals and business owners first. We’ve experienced firsthand the benefits of an expertly-drafted buy-sell agreement — and the pain and financial expense that comes from not having one — and have helped countless construction professionals launch their business and maneuver through transitions the right way.
If you’re ready to give your business the best chance of success, MNCLS can help. Call our office at (651) 484-4412 or complete our online contact form to get to work.