Buy-Sell Agreements: Who Will Purchase the Ownership Shares of a Departing Owner?

by Adam Lappin

Developing and building a company is not an easy process, so it is important to ensure that the departure of an owner is not going to destroy the business or bring on a different owner that wants to direct the company in a completely different direction.  With a buy-sell agreement (also called a buyout agreement), you can control what happens to the ownership shares and the company when an owner departs for whatever reason. What happens upon departure of a partner is something that the owners need to talk about before it becomes an issue, and the reason an owner departs could change what happens to his or her shares.  In most instances, the first right to purchase a departing owner’s shares goes to the company or the other shareholders.  However, everyone’s situation is a little different, maybe the next of kin is allowed to inherit, or maybe you want to give an employee the option to purchase.

The decision on who can purchase depends on a variety of factors.  Some of the more important factors are the number of parties involved and the type and complexity of funding.  When there are two owners, generally the option to purchase would go to the other.  When dealing with many shareholders, an entity redemption arrangement is more easily implemented.

Without a buy-sell agreement, a co-owner may just sell his share to a random person off of the street, die and have his or her estate inherit the shares, or maybe the owners just cannot agree on a price to buy back the shares which could force them to liquidate the company.  It is always better to plan ahead to ensure the future of the company then it is to leave it to chance.  A well-developed buy-sell agreement can cut out even more uncertainty and legal fees by determining how the departing co-owners shares shall be priced, which I will examine in my next blog.