What is a Buy-Sell Agreement and Why Does Your Business Need One?

Do you have dreams of starting your own business? If you want to have a chance to succeed, there is a nearly endless number of contracts and agreements that you will probably need to utilize to ensure that you are prepared for whatever your growing company will have to face.

If you are going to have any co-owners, then one of the most important of those agreements is the “Buy-Sell Agreement.” It would be wonderful to believe that things will never change and that you and anyone else who has an ownership interest in your company will continue to maintain the status quo that was established during your startup, but no one can outrun the upheaval of life. This contract is essential for any partnership and will be your company’s saving grace should your co-owner’s circumstances ever change.

What is a buy-sell agreement?

Buy-sell agreements are legally binding contracts between the co-owners of a business. It can come in the form of a clause within your partnership agreement, within your operating agreement, or it can serve as its own freestanding agreement.

Also known as a “buyout agreement,” buy-sell agreements provide protection for all co-owners should one of them choose to leave the company for any reason. It also dictates what happens to the ownership interests of a co-owner who dies or is medically incapacitated. They can come in the form of a cross-purchase agreement, where one owner can buy a co-owner’s shares themselves, or a redemption agreement where the company itself will buy the co-owner’s shares.

What should a buy-sell agreement cover?

One of the most important aspects that every buy-sell agreement should have is dictating who has a right to buy or take over a co-owner’s share of the company when they depart. This may involve opening the ownership stake up to outsiders, or limiting it to those who already own a share of the business.

Your agreement should also dictate what events and circumstances can trigger a buyout of a co-owner’s interests. Some examples of these events include death, medical incapacitation, retirement, etc.

Finally, your buy-sell contract should also dictate the price that will be paid for an owner’s share of the company in the case of a buyout.

Why do I need a buy-sell agreement?

There are more scenarios than we can list where a buy-sell agreement would be essential. What happens to your company when a co-owner dies unexpectedly? His or her stake in the company doesn’t just go away, it has to go to someone. What happens if a co-owner becomes disgruntled and wants to hurt the company by selling his or her share to a rival? Without a buy-sell agreement, they can do what they want with their stake in the company. A buy-sell agreement is essential for business of all sizes that have two or more owners. You need it to help protect you from the unexpected and to prepare for any situation that could affect the ownership interests in your company.

The more valuable your company, the higher the risk you take by not having a buy-sell agreement in place. Call Integrated General Counsel and let us serve as a neutral party to help you and your partners put together a thorough and fair buy-sell agreement that will make sure your company is always ready for whatever the future holds.

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Written by Integrated General Counsel

Our focus includes handling a variety of corporate matters and also includes litigation in state and federal courts. Our current practice includes providing transactional services and representing a variety of small and medium-sized companies as their outsourced general counsel.