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The beginning of a new year is a perfect time for business owners, especially new business owners in partnerships, to take a step back and make sure everything is in order. A lot can change over the course of a year, and the beginning of the year is a good time to look at where you, as a business owner, are personally vulnerable to losing your ownership interest. Conversely, if a business partner has not been living up to their end of the partnership, it may be time to squeeze them out.
One of the most important documents business owners often overlook is their buy-sell agreement. A buy-sell agreement is typically the document that controls when a business partner can be bought out, or can sell their interest. They can also be viewed as business wills, or a succession plan of sorts. Frequently, for partnerships and joint ownerships, there are triggering mechanisms in these agreements that enable owners to sell their interests or be bought out only by other owners.
Review the Agreement Annually, At Least
Depending on the language contained in the buy-sell agreement, it may be advisable to make sure you review it at least annually as part of a year-end, or new year business audit. If your buy-out agreement contains provisions for being forcibly bought out over your objection if certain conditions are met, it could be rather costly to not be aware of the conditions.
However, if your partner has violated the partnership agreement, reviewing your buy-sell agreement might remind you of your ability to buyout your derelict partner. Attorneys advise business owners to set up buy-sell agreements at the same time as starting the business as it keeps joint owners honest.
While a buy-out agreement may be a rather lengthy and detailed document or contract section, preparing an outline of the pertinent provisions can help make the annual review less time consuming. In particular, the triggering provisions, the ones that will enable a buy-out, should be highlighted and reviewed annually. Also, it is worth noting whether there are restrictions on who can initiate the buy-out, and how the price is set.