The Value of a Shareholders Agreement
You and your business partner Ryan run a hospitality business as 50/50 partners. You may have a written agreement in place or a mere friend to friend handshake. Due to unfortunate events, Ryan passes away. What happens to your business? Is Ryan’s spouse or child your new business partner? In the best interest of your business, do you have the legal rights or obligations to buy them out? Can you go out on your own and run another hospitality business? What if you pass away before Ryan? A properly drafted buy-sell agreement will prescribe exactly what is to happen if such circumstances transpire.
The cost of entering into a buy-sell agreement is insignificant compared to its benefits. Providing your company with an element of reliability will prove invaluable to your businesses success. Beneficial to even the most basic of businesses, a buy-sell agreement reduces the emotional cost of disputes between family members, friends and co-owners often associated with major events. It can also prove crucial as a bible or ‘code’ by which the business is run during these difficult periods. This is both in an internal sense for the business and in maintaining a composed front end appearance to clients.
A well drafted buy-sell agreement:
- Guarantees the withdrawing owner that their share of interest in the business will be purchased.
- Guarantees the surviving owners do not go out of pocket as the shares in question MUST be sold to the company, protecting the continuation of business.
- Ensures a fair purchase price, valued according to market rates at the time of purchase.
- Provides a secure source of funding, making cash available when the time comes by way of insurance policies (life, health) so that the liquidity needs of the company can continue to be met.
- Provides a valuation of the deceased’s owner’s interest in the enterprise for reasons of estate tax.
Does this sound like an agreement worth entering into?
The information on this blog is general in nature and does not constitute legal advice. For expert legal advice in drafting the right buy-sell agreement for your business, please contact Shane Rohde at [email protected] or Rebecca at [email protected].