Buy-Sell Agreements: The Legal Protection
You Need Beforehand
Planning ahead of time is the key to avoiding costly legal fees and loss of bargaining advantage. Dealing with various contingencies before they arise will protect the parties entering into a business partnership. Regardless of the harmonious relationship with
business partners, the Buy-Sell Agreement will help to define terms before any potential issues arise. This Agreement is a binding contract between business partners or shareholders regarding the future ownership of the business.
Why is a Buy-Sell Agreement Necessary?
Whenever there are two or more owners of a business, there are events that may require one owner to sell his ownership interest. When one person goes bankrupt and is forced to liquidate or becomes incapacitated or dies, the question arises of how to sell this business partner’s interest and how the interest is valued. The agreement ensures continuity of ownership in the business and fair treatment for both the buyer and the seller. These issues are easier to address when everyone is getting along in the business formation stage, rather than at a time when the partners have opposing interests. The solution is a carefully worded contract, typically called a Buy-Sell Agreement.
What does a Buy-Sell Agreement Contain?
A Buy-Sell Agreement should be carefully drafted, as it is the precedent for what may come. When a Buy-Sell Agreement encompasses the parties’ negotiated consensus, all parties are protected. The sections below provide some factors to consider when consulting a legal professional regarding a Buy-Sell Agreement.
What events will trigger a buyout?
The Agreement instructs the parties as to which events trigger a buy out of a partner’s interest. The common events are:
- An attractive offer from an outsider to purchase a partner’s interest in the company
- A divorce settlement in which a partner’s ex-spouse is entitled to receive an ownership interst in the company
- The foreclosure of debt secured by an ownership interest
- The personal bankruptcy of a partner, or
- The disability, death, or incapacity of a partner.
Who can buy a departing partner’s or shareholder’s share of the business (this may include outsiders or be limited to other partners/shareholders)?
- Cross-Purchase Agreement: In this type of Agreement, a withdrawing owner agrees to sell his interest to the remaining owners. This type of agreement works well in a closely-held small business.
- Entity-Purchase Agreement: In this type of Agreement, the withdrawing owner agrees to sell his interest to the entity. The entity then dissolves the ownership interest or redistributes it among the remaining owners.
This article is designed to introduce you to the importance of asset planning and the need to protect your wealth. It is published as part of general information series for visitors to our web site. If you need to pursue an asset protection strategy, make sure you do it with the assistance of a professional.
This informational article is published by Greenberg & Co., Two Corporate Drive - Suite 234, Shelton, CT 06484 USA. We can be contacted via telephone by calling (203) 225-0200. Our website address is: www.greenbergandco.com, and we can also be reached by email at