What is a Buy-Sell Agreement?

A buy-sell agreement is a legal contract entered by business partners stipulating what will happen should one partner leave the business or can no longer continue working. However, a buy-sell agreement generally refers to the transfer provisions of a more detailed partnership agreement. Buy-sell provisions may stipulate many items, including the terms of the sale, the purchase price, how the ownership of the business will be transferred, and how the purchase will be financed.

Buy-sell agreements often include provisions for situations such as retirement, divorce, disability, and death of a co-owner. The goal of a buy-sell agreement is to provide a plan for the smooth transition of ownership and protect the interests of the co-owners and the business itself.

How Does a Buy-Sell Agreement Work?

Buy-sell agreements are typically used by limited liability companies, partnerships, sole proprietorships, and statutory close corporations to ensure seamless transitions in business ownership when a co-owner retires, passes away, or decides to leave the business. This document may require that the departing co-owner’s share be sold to the remaining partners or the company, according to the available agreement.

The buy-sell agreement also establishes how the actual value of the business will be determined should a triggering event occur. This is usually based on a predetermined formula or another agreed-upon method. Funding a buy-sell agreement needs to be a consideration as well. One common funding method is a term life insurance policy on the equity owners, which can either be for the benefit of the company or the purchasing owner.

With a buy-sell agreement, business partners enter into a written agreement that defines the terms and conditions of business ownership. This contract is often prepared with the help of an attorney. Having this document can help avoid unnecessary battles for control with the departing partner’s surviving family members.

Types of Buy-Sell Agreements

The most common types of buy and sell provisions are:

Cross-purchase terms: These terms dictate in which situations the remaining co-owners agree to purchase the shares or ownership interest of the departing partner.
Entity redemption: Situations in which the business entity will buy back the shares of the existing owner. The business will later retire or resell those shares.
Drag-Along/Tag-Along rights– Provisions to address situations where one or more partner(s) intend to sell their interest to a third party and can force the other partner(s) to also sell, and conversely, situations where partners may join a sale in which other partners are selling.

What Is The Importance of Buy-Sell Agreements?

There are several reasons why business owners should consider buy-sell agreements. First, business agreements can help ensure the continuity of the business by providing a smooth transition of ownership in the event of retirement, death, or departure.

A buy-sell agreement also helps protect the interests of all business partners. It ensures the existing owner receives fair value for their business shares while safeguarding the interest of the remaining owners. As a result, it prevents unwanted individuals from becoming owners.

Another significant benefit of a buy-sell agreement is that it helps business partners avoid conflicts and disputes. By clearly defining the terms for the sale of ownership, a buy-sell document minimizes the chances of disagreements and legal battles.

Get in Touch with Our Charleston Business Attorneys Today

Whether you need help crafting or implementing a buy-sell agreement, the business attorneys at Buxton & Collie, LLC can help. Our attorneys are well-versed in business law and provide legal assistance to individuals and businesses.

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