Operations

3 Reasons Limo Service Owners Need A New Buy-Sell Agreement

Posted on August 20, 2012 by Spencer Tenney

A relevant buy-sell agreement ensures that, even if the worst happens, your well-laid plans — and your business — remain protected.
A relevant buy-sell agreement ensures that, even if the worst happens, your well-laid plans — and your business — remain protected.

The purpose of a buy-sell agreement is to lay out what will happen to a business if a co-owner leaves the company by choice or by circumstance. Even if you’re not planning on buying out a partner or putting your transportation business for sale anytime soon, it’s impossible to predict the future.

If you or your partner experienced death, disability, bankruptcy, or divorce, what would become of the business? Inadequate legal contracts put you at the mercy of fate. A relevant buy-sell agreement ensures that, even if the worst happens, your well-laid plans — and your business — remain protected.

1) Your family has changed. When a business partner leaves, it can put the remaining partner and business into turmoil, especially when family is involved. If you or your partner have married or had children since forming your original buy-sell agreement, you should consider updating the document to reflect your current situation.

A buy-sell agreement can protect the remaining partner and family from being forced into a sale at below market value. In the event of a death, it is often in the best interest of the deceased’s surviving spouse to receive as much cash as possible from the business — or sell their share in the company to an outsider.

However, it’s in the best interest of the surviving partner to continue operation. A buy-sell agreement can prevent litigation by establishing beforehand who can buy the departing partner’s shares, what events will trigger the buyout, and how much will be paid.

2) Your business value has changed. The buy-sell agreement defines the price that will be paid for a partner's interest. But if you haven't updated your agreement for a few years — or ever — that price is probably based on an outdated value. As the market changes and a business evolves, transportation business owners should consider including a measure that updates value accordingly. Because closely held businesses can experience fluctuations in value, an agreement should be updated every year or two. Receiving a current transportation company valuation, rather than applying an objective formula, can capture value most accurately.

3) Your plans have changed. If you or a partner is thinking of retiring or selling your share in the business, planning well in advance will provide time to bring your current buy-sell agreement up to speed or create one if it doesn’t exist. Without an appropriate plan in place, an unexpected ownership change could disrupt business operations and threaten stability.

The sooner you can agree on exit terms, the better your chance of avoiding conflict and receiving a fair price. Business partnerships can raise complex legal questions. But with assistance from experts, the solution — in this case, a properly prepared buy-sell agreement — is simple.

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