What is a Company Buy-Sell Agreement?
Buy-Sell Agreements Explained
I am lucky to be a shareholder in an outdoor outfitting company that recently updated its existing Buy-Sell Agreement. As I was reading through the attorney’s final document for signing I began to realize just how important a solid buy-sell is to protect a business, both now and in the future.
It also got me to wondering how much other small business owners really know about Buy-Sell Agreements, why they might need one, or even why they should care in the first place. So here’s a short overview that provides some of the key points that I found.
What They Are & Why They Matter
A buy-sell agreement is a legally binding document that defines what happens to an owner’s share of a business if they leave, retire, become incapacitated, get divorced, or pass away. They can be fine-tuned in many ways to handle other planned and unplanned business succession events. We’ll see how shortly
The Essential Business Safety Net
Buy-Sell agreements are often used in partnerships, closely held corporations, and LLCs to ensure business continuity, or possibly the avoidance of unwanted new owners. As a binding contract they can save a business from future disputes arising from a voluntary or involuntary ownership change and protect the business from many other uncertainties.
Benefits of a Buy-Sell
Ensures business continuity and stability.
Prevents ownership disputes.
Protects financial interests of owners and heirs.
Provides a clear exit strategy.
Key Elements of a Buy-Sell Agreement
Triggering Events – Specifies the circumstances that activate the agreement, such as death, divorce, disability, retirement, bankruptcy, or voluntary exit.
Valuation Terms – Defines how the business will be valued when a sale occurs. There can be a predetermined formula, an appraisal, or some form of agreed-upon value.
Buyout Terms – Determines who can buy the departing owner’s interest. Examples could be the remaining owners, the company, or an outside party and how and when the purchase will be funded. Will it be cash, installment payments, life insurance?
Restrictions on Transfers – Restrictions might limit the sale of ownership to outside parties to maintain control among existing owners. Another restriction example could be the company retaining first right of refusal for any potential sale.
Using The Right Buy Sell Agreement
Types of Buy-Sell Agreements
Cross-Purchase Agreement – Co-owners agree to buy the departing owner’s shares.
Entity-Purchase Agreement – The business itself buys back the departing owner’s shares.
Hybrid Agreement – Combines elements of both, allowing either owners or the business to buy the shares.
A qualified attorney is needed for guidance on drafting a buy-sell agreement for a specific business structure. Good luck!
Contact me at: ldr@landdevelopmentrealities.com
