What is a Buy-Sell Agreement?

A buy-sell agreement is a contract (or sometimes part of a contract) in which a business owner makes an agreement with the other co-owner or owners as to what happens to their share of the business upon the occurrence of certain “triggering events” such as death, incapacitation, divorce, bankruptcy, or retirement. In some ways it is similar to a will in that it is a legal agreement that governs the disposition of property upon the occurrence of a certain event or events.

The importance of a buy-sell agreement can perhaps best be understood by considering what frequently happens when business owners don’t have one – a litigation attorney’s dream scenario. Family in-fighting, disputes between the deceased or incapacitated business owner’s family and business partners, lawsuits to determine the intentions of the business owners, mediation, arbitration, and long, drawn-out court proceedings that may never actually resolve anything are all possible. Just as in situations when a person dies without a will, if a co-owner of a business dies without a buy-sell agreement in place, a judge will determine what should happen. Often nobody is happy when that happens.

How They Work

Buy-sell agreements work by setting forth certain major life events that will trigger a buyout of the co-owner’s shares, either by the other owners or the company itself. Triggering events usually include big life events like death, incapacitation, retirement, bankruptcy, and when the owner wishes to leave the business. The buy-sell agreement will specify not only who can purchase the ownership share of the departing owner, but at what price and under what terms.

Planning for your eventual death or departure from a business may seem impractical or unimportant in early days, especially if you are young. On the other hand, the process of negotiating a buy-sell agreement is more easily accomplished at the outset of a venture.  All of the business owners can determine the fate of their ownership share and agree on the terms of the buyout during a time when the parties are mutually interested in coming to a solution and there is no sense of urgency. Much like wills, the time to create a buy-sell agreement is when everyone is healthy, on the same page, and able to objectively evaluate the future.

Entering into a buy-sell agreement early also gives the parties time to think about how to value the business when the time comes and how the other owners or the company will finance the eventual buyout. Often times, the funding will come from life insurance policies held on the participating owners’ parts to ensure sufficient funding (sometimes called “Key Man” insurance policies).

If you co-own a business and don’t have a buy-sell agreement in place, there is no better time than now to get started. Our firm is well-versed in buy-sell agreements and can assist your company in drafting one that will ensure the successful succession of your business when the time comes. Contact us today to get started.

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