What is a Buy-Sell Agreement?
A Buy-Sell Agreement (also known as a Buyout Agreement) is a binding contract between two or more owners of a business that sets forth what will happen if one of the owners dies, chooses to leave the business, or is forced to leave the business due to external circumstances. A Buy-Sell Agreement can be a separate document or can be several legally binding clauses incorporated into an operating agreement or business partnership agreement. The document, or clauses, set forth what will happen during various contingencies, such as:
- What events will trigger a buyout? Common events that trigger a buyout include death, disability, retirement, or owner leaving the company willingly or unwillingly).
- Who can buy an exiting owner’s share of the business? Only current partners/shareholders, or outsiders?
- How will business determine the value and buyout price of the exiting business owner’s interest?
When should I enter into a Buy-Sell Agreement?
People usually enter into business ventures with people they like, who they get along with, and who share their long term business goals; no one ever enters into a business agreement intending for things to go sour.
However, just like a pre-nuptial agreement guides the divorce when marriage ends, a Buy-Sell Agreement guides the buy-out of an exiting partner when the business partnership ends. Even though the business venture may be entered into with the best of intentions by all partners, it is best to execute a Buy-Sell Agreement at the inception of the business venture.
Even if you do not foresee a “business divorce” in the future, a Buy-Sell Agreement is an important contract to have because it also acts as a “business will.”
- If a business partner suddenly dies, could his or her spouse or other family member become a business partner? Would you want to be business partners with his or her spouse or other family member?
- What if the spouse or family member of the deceased partner does not want to operate the business with you, and demands a payout of the deceased partner’s share? How should his or her share be valued and paid?
- What monies, insurance or other funds will be used to pay the deceased partner’s share?
A Buy-Sell Agreement allows you and your business partners to address these questions and others in advance and set forth a plan of action as to how various contingencies will be handled. If you are currently in business with a partner or partners, and do not have a Buy-Sell Agreement, it is advisable to execute such an Agreement.
It is advisable to consult an attorney to discuss the various issues that should be addressed in your specific Buy-Sell Agreement to be sure the contract is tailored to your specific business partnership venture.