Why Having a Strong Buy-Sell Agreement is Essential for Your Construction Business

  • Editorial Team
  • News
  • 23 May 2022

Just like having a blueprint is essential before you can start construction on a building, having a strong buy-sell agreement for your construction business is important before you can establish yourself in the industry. In the construction industry, a buy-sell agreement is comprised of details of how ownership transitions will take place. The owners of the company describe in the agreement how power will change hands if certain events take place. For this purpose, you will need to go through a process to determine the possibilities of what is most likely to happen.

There are a lot of different reasons for which a transfer of power may be necessary, and these could be under both good and bad circumstances. Circumstances that lead to ownership transitions are called “triggering events.” If you do not pay enough attention to your buy-sell agreement before starting a business, you may be faced with unanticipated consequences later. If you are not the sole owner of your business and your partner files for bankruptcy, a part of your company will be owned by the bank. There are other such situations that could arise which will ultimately result in a conflict if you do not pay attention to your buy-sell agreement.

Even though there are a lot of consequences, many business owners fail to prioritize having a buy-sell agreement. Research suggests that three out of four construction businesses do not have documented succession plans for their business. If there are no succession plans in place, these businesses will lose value upon the death of their owner due to lack of proper authority.

Types of Buy-Sell Agreements in the Construction Industry

In the construction industry, two types of buy-sell agreements are common. Those are cross purchase agreements and redemption or liquidation agreements. No matter what the situation, there are certain steps that business owners can take to ensure the future of their business. 

Timing is Key

You need to have a buy-sell agreement for your business early in the process. If you have a proper plan in place ahead of time, the transition of ownership will be smooth. It will not have a negative impact on the business. 

Value of Ownership

Make sure to hire a business valuation expert for your construction firm. A lot of companies have their own predetermined clauses and simply have them included in the agreements. However, doing this sometimes fails to reflect the true value of the business at the time of application. The type of language that is used in the buy-sell agreement plays an important role when that agreement is utilized, and it is very important that you determine the value of ownership interest that is going to be purchased or sold before the agreement is drafted. Owners should have insurance policies which supply them with enough cash to buy out ownership interest, and you can outline this requirement in the agreement in case a triggering event occurs.

Tax Exposure

Make sure to include tax planning in your buy-sell agreement. You can minimize tax exposure by setting up a payment plan. This is extremely important, especially if most of your wealth is inside the business.

Hire someone to evaluate your company’s value every few years. By doing so, all the owners will be reassured that the original buy-sell agreement is being upheld by the company. It is common for a company to undergo certain changes with time, and the buy-sell agreement should take all possible changes into consideration. 

With the recent ousting of the CEO of a CAT heavy equipment dealership in Fenton, Missouri and all the chaos that ensued soon after, all construction businesses should consider drafting a buy sell agreement.