Buy-Sell Agreements: Does my Business Really Need One?

by Adam Lappin

Short Answer: If you have a partner, the answer is yes. It is always important for partners to be on the same page as one another when making decisions regarding the business, but what happens when a partner wants to retire or unexpectedly dies?  Does the departing partner just get to pick his successor in interest?

A buy-sell agreement, also known as a buyout agreement, is a legally binding agreement between co-owners of a business that governs the situation if a co-owner dies or is otherwise forced to leave the business, or chooses to leave the business.

Often times, when starting a business, partners do not think about the end game because it can be viewed as a negative.  The partners will instead be thinking about the growth and profits, instead of what happens upon death, disability, or retirement of a partner.  However, it is important to think about the end at the beginning because something unexpected could happen at any time, and it is important to have safeguards in place to ensure a smoother transition.

Buy-sell agreements serve a critical purpose for all businesses.  When drafting a buy-sell agreement, the important things to consider are: (1) what will trigger the buy-sell agreement, (2) who will purchase the ownership shares, (3) how will the price of the ownership shares be determined, (4) what will be the terms of the purchase, and (5) what are the tax consequences that arise from the buyout?

In future blogs, I will examine some of these questions and their importance.