Pointers for negotiating a buy-sell agreement
A buy-sell agreement is the contract for sale of a business. It is vital that the agreement is clear, and written down. By carefully discussing key points, you and the other party can avoid conflict now. It may seem like overkill to consider some of the details below, but as an attorney with over nine years’ experience in litigation, estate planning, and business law, I know that vague contracts are usually the ones were problems arise.
First, your agreement must be in writing. Don’t do anything on a handshake. This is your livelihood and your business. Why would you risk the roof over your head (or over your kid’s head, or over your employee’s head) when it is simple enough to put words to paper. The other party may sound reasonable in trying to waive this off. “Oh, don’t worry about it. I trust you.” This kind of response can seem reasonable, even friendly, especially if the other party is a friend or family member. But, if they take this kind of loose attitude towards what is probably one of the biggest financial transactions in your life, then what kind of loose attitude have they taken in running the business? Or in helping you run the business in the future?
Second, look at the books. It is vital that you actually look at the filed tax returns, profit and loss statements, and balance sheet for the last three years, and the year-to-date. These form a financial snapshot of the company. They will show you how the company has been run, whether it is growing or not, and where you might be able to adjust the budget. From these disclosures, you should project a budget moving forward to ensure that what you are buying is going to be viable in the future. If the other party balks at giving you this information, then I suggest walking away. Whatever their objection is can be worked around. But you buying a business and being in the dark regarding its finances is simply unacceptable.
Third, get key man insurance to secure any loan. Many buy-sell agreements are financed by the original owner carrying a loan that the buyer will pay off over time. What this means is that the original owner continues to carry the risk if the business fails. If you choose to carry the loan, then you should at least require that the buyer obtain a life insurance policy sufficient to cover the balance of the loan and the debts of the business. In this way, if he dies suddenly, there will be enough liquidity to close the business and pay off its debts – including the purchase loan owed to the seller.
Negotiating the sale, or purchase, of a business is a nuanced transaction. There are many, many things to consider in such an agreement that I have not even touched upon here. It is vital that, prior to considering such a big transaction, that you seek wise legal and accounting advise. But, if the ball is already rolling, be sure that you at least consider the above pointers.