- February 6, 2011
- Posted by: Seth Heyman
- Categories: Business Law, Contract Law, Featured
A Buy-Sell Agreement, also known as a buyout agreement, is a contract entered into between co-owners of a business that governs what happens when an owner/shareholder dies, becomes incapacitated, wants to sell his or her interest, or otherwise wants to discontinue his or her involvement in the enterprise. A Buyout Agreement can be a standalone document, or the essential elements of the arrangement can be inserted into corporate bylaws, LLC operating agreements, or other types of agreements.
As is often the case in a small business, the participants want to choose who their partners are. In the absence of a Buy-Sell agreement, that choice disappears, and participants may be able to dispose of their shares however they choose, unless such transfers are addressed in the corporate bylaws or the LLC Operating Agreement. This means that the owners of a small business run the risk of finding themselves with an unfamiliar, and potentially difficult partner.
A Buy-Sell Agreement can be thought of as a “business will,” and, in the case in which an owner dies, the buyout specified in the agreement can be funded through a special life insurance policy on the participating owner’s life. This is known as a “triggered buyout plan.” If an owner simply wants to sell or otherwise transfer his or her shares, a Buyout Agreement will govern that transfer by incorporating clauses that spell out:
- How the price to be paid for an owner’s interest in the venture is to be calculated.
- Who can buy a departing owner’s share of the business. A clause may specify that the other shareholders must first approve transfers to outsiders.
- What type of events may trigger a buyout, such as death, disability, retirement, etc.
There are an enormous number of potential variables to consider when putting together a Buy-Sell Agreement. In light of the importance it may represent to your business, you may want to consider retaining an experienced contract attorney to handle the myriad details.