What is a Buy-Sell Agreement?

A buy-sell agreement is a binding contract that details what will occur in the case of specific events that lead to an owner’s departure from the company. It explains how their ownership share will be transferred if they leave and defines important matters such as who can buy their interest and at what value. 

Not having a buy-sell agreement can be problematic when an unexpected event occurs that affects equity ownership; thus, it is important to determine these details ahead of time.

Buy-sell agreements clearly state if someone can buy the departing owner’s interest, as well as how to reach a conclusion that benefits the company. One example of this is a redemption agreement, where a company purchases the departing owner’s interest. 

Another example is a cross-purchase agreement, where owners enter a contract that states that remaining owners either can or have to purchase the withdrawing owner's interest when a triggering event occurs.

Triggering Events and Unresolved Disputes 

Death and disability are examples of triggering events that should be discussed when considering a buy-sell agreement. While no one likes to think of the unexpected, it is wise to ensure that a business can continue even in the case of an owner undergoing a tragedy. 

Termination of employment is another possible triggering event. The terminated owner should know if they will be keeping their equity or if they will be on the receiving end of a buy-out beforehand. In addition, owners should discuss and document in advance matters such as who, if anyone, has the power to fire an owner.

Sometimes, co-owners find themselves facing disagreements that cannot be resolved and unable to find a path forward. In this case, one owner may leave while the other stays, and buy-sell agreements help prepare for these situations in advance with a process to decide who goes and who stays. 

Involuntary Transfers and Third-Party Sales

A buy-sell agreement should also cover involuntary transfers and third-party sales. Involuntary transfers are when an owner goes bankrupt and the bankruptcy court orders the transfer of that owner’s company stock to the creditor, or in a divorce where the stock is transferred to a spouse. On the other hand, third-party sales are when an owner receives an offer from someone to buy their equity. 

Typically, the other owners want the right to buy that stock rather than having an outside creditor, ex-spouse, or third party as an owner. 

Price, Payment Terms, and Other Provisions

Once you decide what happens and if the stock is to be sold, then the next question to be resolved is what the purchase price is and how that purchase price will be paid—all cash, or perhaps cash plus a promissory note.

The buy-sell agreement may also include a covenant not to compete of some sort, where the departing owner has restrictions on their activities for the next few years. A buy-sell agreement should cover all of these terms up front, so that owners are not left with more hard feelings, a real dispute, and more legal fees later on. 

Local Legal Counsel 

At MKP Law, we can help with business law, estate planning, tax planning, and much more. Our team can guide you through the details of buy-sell agreements and answer all of your questions.

For more information on how we can help, reach out to one of our attorneys today.