Buy and Sell Agreements are the new handshake deals
Are you considering starting a business with a friend or your spouse, or selling your business? You may have already started negotiations and come to a handshake deal (a verbal undertaking) with your partner or the purchaser. You may feel comfortable with this right now while everyone seems to be on the same page, but there are many reasons why handshake deals can be a risky choice! Other than the main concern of whether or not your handshake deal constitutes a binding contract and precisely what the terms of that contract might be, there are other important factors to consider which a business agreement can address.
What is a Buy and Sell Agreement?
A Buy and Sell Agreement is a legally binding written contract that sets out the terms and conditions for the transfer of any owner’s business interests under a range of circumstances, where there are two or more owners.
Why is a Buy and Sell Agreement important?
A Buy and Sell Agreement addresses the possibility that you or your business partner/s may become disabled, incapacitated, or die leaving the business in limbo. The agreement will set out the ‘what if’ situations and the solutions. A Buy and Sell Agreement sets out precisely what will happen in the event of the departure of one of the business owners/partners or the death of one of the business owners/partners, so that all parties can be reassured that the business is protected and their family will be looked after in the event that they pass away.
These agreements are crucial for the following reasons:
- If one partner to the business becomes incapacitated or dies, the families of the partners do not need to become involved in business disputes.
- There is minimal disruption to the operation of the business and to business decisions.
- They minimise the risk of disputes and help prevent litigation.
It is important to consult both an accountant and lawyer when considering selling or starting a business. If you have already set up the business, it is never too late to get in contact to make sure you have considered all relevant circumstances.
Example situation
Fred and Bob engage TGB to draft a Buy and Sell Agreement as they wish to start a partnership business. The document is executed, and 5 years pass. Bob is involved in a tragic car accident leaving him paralysed and incapacitated. Fred cannot operate the business alone and wants to sell the business to his friends. Fred can talk with TGB and discuss this situation with them to obtain guidance about the next steps. Thankfully the Buy and Sell Agreement covered this situation and allows Fred to sell the business without intruding on Bob’s family and friends.
Insurance
You may also consider a life and disability insurance in the agreement for each partner. In the above example, this would provide Fred with the funds needed to buy Bob’s share from him so that Fred can continue the business as a sole trader. Again, this provides an already agreed solution and potential relief for Bob’s family and friends.
Estate Planning
It is important that people have their estate planning in place such as their Will, Enduring Power of Attorney and Advance Care Directive. The Agreement will only protect the business and not any other assets – having your estate planning in order will help in terms of your personal assets.
Get in touch!
At Tindall Gask Bentley Lawyers, our Commercial law team is experienced in all aspects involved in the sale, purchase or structuring of businesses, including the drafting of comprehensive Contracts and Agreements to ensure that all you are covered, no matter what life throws your way!
Find out more about how TGB can help you with your Business. Get in touch with us here or call us on (08) 8212 1077 to talk to a member of our team.