Buy-Sell Agreement

Answer 1

Get Started

The Buy-Sell Agreement is an agreement among business owners. It has several primary purposes. First, owners of a small business often wish to limit who can become a new co-owner. For example, they may not want spouses or children of their fellow co-owners to become owners. Without a buy-sell agreement, this type of transfer could occur if a co-owner dies or gets divorced. Thus, the Buy-Sell Agreement includes a general prohibition on the sale or transfer of ownership interests, except under the specific circumstances specified in the agreement.

Second, owners of a small business may wish to "create a market" for the sale or transfer of their ownership interests. In the absence of a buy-sell agreement, owners may find that they have very few opportunities to sell out if there are important reasons why they might wish to sell, such as death or retirement. Therefore, the Buy-Sell Agreement provides a mechanism for the purchase of the interest of an owner who retires, dies, becomes disabled, or simply wishes to sell to someone else. If the sale or transfer results from retirement or death, the other owners (or the company) are obligated to purchase the ownership interest. In contrast, if an owner simply wants to withdraw, the other owners may exercise an option to purchase the withdrawing owner's shares to prevent them from being sold to an outsider, but it is up to the withdrawing owner to find an outside buyer.

Third, the Buy-Sell Agreement specifies the mechanism for determining the purchase price. It also sets forth terms for how the purchase price will be paid. Owners often believe that they can resolve these issues as the circumstances arise. However, they may discover to their dismay at a later point, that "selling" owners do not have the same perspective on fair price as owners who wish to remain.

Funding of the payment of the purchase price of a withdrawing Owner is handled by requiring the Owners to purchase life insurance on each other. This works well if the withdrawal occurs because of death. For other situations, the Buy-Sell Agreement allows the remaining Owners to pay over a period of time on an installment basis.

Ideally, the Buy-Sell Agreement should be made and signed when the Company is formed (if the business will have more than one owner) or when it will first have more than one owner (if the business begins as a one-owner business). Generally, any disputes under the Buy-Sell Agreement should be handled under the laws of the state where the Company is located.