Kentucky spouses that share a business face difficult choices when they decide to end their marriage, since dissolving their marriage could dissolve their business if a judge requires the sale of the business to split the proceeds between the spouses. An alternative is for one spouse to buy out the ownership interest of the other spouse. Business owners sometimes set the terms of a buyout in advance with a buy-sell agreement.
Forbes explains that business owners employ buy-sell agreements to create an exit strategy for a business owner. It defines how to buy out the ownership interest in case one of the owners dies, becomes disabled, or divorces. If you think a buy-sell agreement may work for you and your family, here are some things to know about crafting one.
First, a buy-sell agreement needs to set rules. You should establish when and how a buy-sell provision is triggered. Buy-sell agreements can also exclude people from buying the ownership interest of your spouse, and also list who is eligible to purchase the interest. You may also outline how to fund an ownership sale. Possible options include debt, insurance money, or just cash.
Some business owners put in a business valuation clause with a buy-sell agreement. This is to establish how to valuate a business to reach a sales price in the event the business is put up for sale. Options include describing a valuation formula or allowing a business valuation specialist to conduct a valuation. Business owners may tailor a business valuation method to how complicated their business is.
Ideally, entrepreneurs should create a buy-sell agreement long before any event like a divorce requires it. Usually, business partners can come to terms more easily when the business is new and before the two parties have developed opposing views. However, partners should also be ready to modify a buy-sell agreement. Businesses evolve over time, so it is natural a buy-sell agreement may need to evolve as well.
This article is written to provide general information on this topic. Do not interpret it as legal advice for your situation.