Buy-Sell Agreements

A buy-sell agreement is a binding contract among the owners of the business that controls the buying and selling of ownership interests in that business. The agreement dictates who can buy the departing owner’s interest and at what price, or whether the co-owner can sell his or her interest at all. A buy-sell agreement comes into play when a co-owner of the business decides to leave or retire, becomes disabled, can no longer actively participate in the business, or dies.

A buy-sell agreement is necessary to protect the interests of the remaining owners. It can give the remaining owners the power to prevent outsiders from buying in. This can be accomplished by inserting a “Right-of-First-Refusal” provision in the buy-sell agreement, giving the remaining owners the opportunity to meet any outsider’s offer for the departing owner’s ownership interest. A buy-sell agreement can also give the surviving owners the power to purchase the interest of an owner who has died if the surviving owners do not want the inheritors of the deceased owner to become co-owners of the business.

A buy-sell agreement can also protect the interest of the owner who may wish or have to leave the business one day. Due to the lack of a ready market, selling ownership interest in a small business could be very difficult. A “Right-to-Force-a-Sale” provision in the buy-sell agreement requires the remaining owners to buy out the departing owner’s interest at a set price, thereby making sure that the departing owner receives a fair price for his or her ownership interest in the business.