What is a Buy-Sell Agreement?

Starting a business venture is always an exciting prospect. However, you need to take measures to legally protect yourself and your business as it grows, especially if you intend to co-own your business with someone else. 

A buy-sell agreement can be extremely beneficial for co-owners of a business. It puts a plan in place to be used if either owner’s circumstances change and will not be an owner of the company.

What does a buy-sell agreement do?

A buy-sell agreement, also called a buyout agreement,  is a legally binding contract between co-owners of a business. It can be a stand-alone document or a clause in your partnership agreement or operating agreement.

The agreement will make a plan for what should happen if a co-owner (or anyone else with ownership interests) decided to leave the company, dies, or is incapacitated. The two general options are:

  • Cross-purchase agreement: One owner will buy the other’s shares.
  • Redemption agreement: The company itself will buy the departing owner’s shares.

However, you can certainly make unique arrangements as suits you and your company.

What needs to be included in a buy-sell agreement?

It is extremely important for your buy-sell agreement to cover who has the right to buy or take over any share of ownership. Some companies choose to allow outsiders to purchase stakes while others limit it to those who are already involved.

It is also important to cover what situations can trigger the agreement to go into effect. Should it go into effect if someone retires? If they move? If they’re incapacitated?

And last but not least, the agreement should make a plan for the value of the ownership shares, or how value will be determined.

Does every company need a buy-sell agreement?

While it’s nice to imagine that nothing will never change, the truth is we never know what the future has in store. Many undesirable scenarios can be avoided through a buy-sell agreement. It can truly be the difference between success and failure.

If you own your company by yourself, you don’t need a buy-sell agreement, but you do need a business succession plan. It’s fair to say that any business with two or more owners needs to have a buy-sell agreement in place. Protect your company, yourself, and spare yourself stress and heartache down the road.

If you are starting a business or currently are taking a risk by not having a buy-sell agreement in place, the Robertson & Williams team can help. Give us a call at (405) 848-1944 to learn more.

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