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What is a Buy-Sell Agreement and Why Your Small Business Needs One
by Marla DiCarlo
April 29, 2022
African american woman advisor shaking hands with clients in the office.

Buy-sell agreements are documents that re-allocate partial ownership of a business or the entirety of the business should certain events develop down the line.

This agreement is commonly used when a business owner no longer desires to own the enterprise or is no longer capable of acting as the owner. Buy-sell agreements also serve the purpose of detailing how businesses separate ownership as well as assets if another business partner divests, if the company dissolves or if an owner/co-owner perishes or becomes disabled. 

In other words, buy-sell agreements are exit strategies for business owners.

As long as a buy-sell agreement is in place, all parties will know who owns what percentage of the business if a partner were to leave or perish. The alternative is to let the courts or executors make such decisions on your behalf. Most buy-sale agreements note a reasonable sale price for the current owner's interest in the business along with the details of when and how each party's share will be distributed to those designated to assume control.

The Importance of Buy-sell Agreements

Every business should establish a buy-sell agreement from day one. This agreement sets fair value for an individual's share in the company to prevent potential legal conflicts down the line. Buy-sell agreements also establish an exit plan for those who have a stake in the business. If business partners decide to go separate ways, it will likely be difficult for them to reach common ground in regard to the terms of the separation unless a buy-sell agreement spells it out well ahead of time. Fail to establish such an agreement, and you will open the door for unanticipated business partners joining the mix.

Buy-sell agreements are somewhat similar to wills in that they determine which parties are entitled to a share of a business they will no longer be involved in. However, if this agreement is not in place, it is possible for the deceased partner's next of kin to take over a portion of the business. This is the type of decision that should be made well in advance with considerable input from fellow owners. 

The bottom line is every single business that is owned by several people as opposed to one person should have a buy-sell agreement in place. If this agreement is not in place, you are asking for drama and potential legal conflict should a partner perish, become incapacitated, decide to sell, or exit the business for any other reason.

How to Set up a Buy-sell Agreement

Setting up a buy-sell agreement is easier than most assume. The document should begin with a statement of the agreement's purpose. In most cases, the agreement is created to ensure there is business continuity should the owner die or leave. The agreement should detail ownership percentages. The limitation of ownership transfer rights must be explained in detail so you have the right of refusal to purchase an ownership stake. The document must also state the exiting owner will give written notice to the business of the intent to sell. The price paid for each owner's stake in the company should be made explicit in this agreement.

A legally “bulletproof” buy-sell agreement will also detail what occurs when certain events unfold such as the owner retiring from the company. Actions to be taken after owner disability, owner death and owner expulsion should be addressed as well. The last step is to finalize the agreement. The document should state how the agreement can be altered or terminated in the future. Be sure to add a choice of law provision just in case a legal dispute arises down the line. This way, the judge presiding over the conflict can issue a decision in accordance with state law. 

Your Buy-sell Agreement Will Provide an Invaluable Peace of Mind

Once your buy-sell agreement is in place, you will rest easy knowing your business's future is no longer in limbo. This document makes it perfectly clear to all relevant parties as to how stakes in ownership will be handled should specific events unfold. Run your buy-sell agreement by your attorney before presenting it to fellow co-owners for signature. Make extra copies for your files, provide your attorney with a backup copy and you won't lose a single second of sleep worrying about the future of your business.

About the author
Marla DiCarlo
Marla DiCarlo is an accomplished business consultant with more than 28 years of professional accounting experience. As co-owner and CEO of Raincatcher, she helps business owners learn how to sell a business so they can get paid the maximum value for their company.
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