The possibility of divorce is why some couples who own a business together place a buy-sell agreement in their business contract. With a buy-sell agreement, one spouse can buy out the ownership interest of the other. This avoids the possibility that a divorce settlement will require a couple to sell the business to divide the value between them.
Examining the terms of a buy-sell agreement is a crucial step in the beginning stages of a divorce. For one spouse to successfully buy out the other, the buy-sell agreement should be clear in how the buy-sell action should proceed. American Business Magazine explains some of the provisions buy-sell agreements contain to make them work.
Triggering the buyout
A buy-sell agreement goes into effect because of a triggering event. A business owner will typically describe what the triggering event will be and how many triggering events to include as part of the buy-sell agreement. Triggering events may include the disabling illness or the death of a business partner, as well as the divorce of the two partners. Triggering events should be specific, as a poorly worded or broadly described trigger might be insufficient to activate the buy-sell action.
Funding the buyout
Buy-sell agreements should also address how to fund the buyout of a partner. Buy-sell agreements can specify a variety of funding methods to finance the buyout, like using company capital, earnings from future company profits, or a loan from a financial institution. Establishing funding is critical because without financing to buy out a partner, the buyout cannot take place.
Valuating the business
A good buy-sell agreement will set in place a way to valuate a business to prevent conflict between the partners down the road. The agreement may determine value by using a formula or an accounting standard, but it can also require an appraiser to conduct a valuation. Business valuation can be a complex matter, so even if a buy-sell agreement sets a method in place, there may be additional questions about the valuation as the divorce proceeds.