A "buy-sell agreement" or "shareholder agreement" is a concept that many small business owners have heard of, but aren't necessarily certain of what it is, how it works, or whether such an agreement is needed in their business.
What is a buy-sell agreement?
Between business partners, shareholders or members, a buy-sell agreement is a sort of "prenuptial agreement". Typically, at the start up of a business endeavor, or when a new partner buys in or is admitted to the business, it is easier to negotiate the terms of a departure or an unexpected adverse event. During this time, partners are optimistic about the future and are typically negotiating in a friendly manner, rather than in an adverse fashion. The buy-sell agreement can protect the business from a variety of unforeseen (and sometimes foreseen but brushed aside) threats, including the divorce of a partner or death or incapacitating disability. Additionally, buy-sell agreements allow for one business partner to acquire the other business partner's interest in the event of a deadlock or dispute over running the business.
How does it work?
Typically, a buy-sell agreement will either be made a part of a company’s governing documents or it can be created as a separate agreement. The agreement will define the circumstances and events that trigger its effect. The agreement will further describe who the purchasers of the departing who the eligible purchasers are. The agreement will provide a method for valuing the business and the terms for conducting the purchase.
Why would you want a buy-sell agreement?
Business owners and partners might want a buy-sell agreement for numerous reasons; however, the ability to obtain some level of certainty in resolving ownership issues without unduly harming or burdening the business is a key factor. The buy-sell agreement also ensures that that when one person enters a business relationship with another, the parties have clearly defined those who may one day gain an interest in the company through unforeseen events and have consented to such new interest owners.This is especially important in small, closely held business, where the owners and partners know each other very well and have developed a substantial level of trust with one another.
For instance, the divorce of a business partner might trigger a requirement that the separating spouse sell any interest awarded as part of the divorce back to the business. A partner’s decision to seek dissolution could trigger a buy-sell agreement, allowing the business to continue on. The death of a partner could trigger a buy-sell agreement, ensuring the business interest is not transferred to the estate.
