What is Buy-Sell Agreement?

February 2, 2013


Business partners need a buy-sell agreement or buyout agreement when they form a business or immediately after. It is an agreement which protects the interest of each party whenever there is an event which would change ownership. The agreement would set the price and the conditions upon which the mandatory or optional buyout would take place. Whenever this process is delayed, the business owners increase their financial risk.

The goals of the buy sell agreement would be:

· the identification of the events which would trigger the purchase of the business and to ensure that the business owners’ interest would be protected,

· to identify the buyer of the owner’s interest in the business, i.e., the company, the remaining owner, or joint ownership of the owner and the business,

· to provide a procedure for determining purchase price of the business, according to market conditions when the event occurs,

· to provide a way of funding the agreement, such as through life insurance

· to determine the deceased owner’ interest in the business for estate tax purposes

There are several events which would trigger the optional buyout of an owner’s interest in the business. They include death or disability of an owner, the decision to transfer ownership to a third party, the retirement of an owner, divorce of an owner, or bankruptcy of the business. In the event of death or disability, the business owner’s family would be protected, since the business owner supported the family with his share of the proceeds of the business. If the decision to create a buy sell agreement is delayed, it places the family at risk for financial hardship. Conversely, divorce or bankruptcy would make the business vulnerable to outsiders, such as a spouse or a creditor. Creating a buy-sell agreement would prevent these outsiders from taking over the business.