Buy-Sell Agreements

The Firm can assist your startup with drafting a Buy-Sell Agreement.  Buy-Sell Agreements are important documents to negotiate and execute for any business with multiple owners.  Buy-Sell Agreements operate to protect both the company and the individual founders to make sure that the business can continue in the case of the death of an owner, disability of an owner, or any irreconcilable differences.  Buy-sell agreements can also be important tools for estate planning purposes.

A lot of business owners may have heard the term “buy-sell agreement,” but aren’t really sure what they are, how they work, or why they would need one.  Some common questions are answered below.

What is a buy-sell agreement?
Think of a buy-sell agreement as a sort of prenuptial between business partners.  It is easier to negotiate the terms of a departure when everyone is friendly and optimistic than it is to negotiate those same terms after feelings are hurt or someone is unhappy with the direction of the company. It is a way to protect the business from a  litany of threats discussed below.  This is especially true in the case of a startup that may involve several new personalities coming to work together for the first time.

How does a buy-sell agreement work?
A typical buy-sell agreement is incorporated into a company’s governing documents or it can exist as a stand alone agreement.  The agreement will define the circumstances that trigger the buy-sell terms.  The agreement will define who the eligible purchasers are as well as the process for conducting the sale.  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?
There are a number of reasons why business owners might want a buy-sell agreement but they all boil down to protecting business.  The buy-sell ensures that that when one person enters a business relationship with another his or her expectations are protected.  The parties clearly define a fair and agreed upon method for determining when and how an owner may sell his or her interest.

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.

You may also be interested in reading David’s article below:

Key Issues That Should Be Addressed In A Buy-Sell Agreement For Texas Businesses

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