Buy-Sell Agreements

What is a Buy - Sell Agreement and why do you need one? The short answer is because you went into business with your friend, brother or associate, not his or her spouse and/or kids.

The long answer is because having a Buy - Sell Agreement is a sound business practice.

When two or more people form a business, regardless of the type of entity, provisions should always be made for each to buy out the other.

This usually happens when one party wants to sell out or retire, dies, files bankruptcy, is convicted of a serious crime, or disappears. When an owner wants to leave the business or some thing bad occurs so one party has to leave, unless there is a smooth transition plan, delay and disruption in the business, caused by disagreements or litigation, can spell doom for the remaining owners.

Some of the important provisions of a Buy-Sell Agreement include:

1. Adequate notice of sale by seller to remaining owner;
2. Time frame in which remaining owner must respond;
3. Deal points including:
   1. method to set price (e.g. appraisal, book value);
   2. payment by cash or on terms (interest rate, amortization schedule, balloon payment, security);
4. Order of priority in determining buyer (corporation, owner of most shares, equal shares purchased by remaining owners); and
5. Right of buyer to sell to third party if other owner declines.

Ownership interest in a business is an asset that passes to heirs on the death of the owner. People who start a business generally do not expect to end up in business with the spouse or children of a deceased owner. Having a Buy-Sell Agreement can prevent this from happening and help insure a smooth transition for remaining owners to buy out the deceased owner and for the latter's heirs to receive compensation determined by the owners who formed the business and were farsighted enough to enter into a Buy-Sell Agreement.