What is a Buy-Sell Agreement?

October 9, 2023

In business partnerships, multi-member limited liability companies, and closely-held corporations, navigating the complexities of ownership transitions can be a daunting task. A buy-sell agreement is a crucial instrument that can mitigate potential conflicts and ensure the smooth transfer of ownership. Understanding buy-sell agreements can help you manage unforeseen circumstances and secure your organization's future.

What Exactly Is a Buy-Sell Agreement?

This is a legally binding contract entered by business owners specifying the fate of ownership interests and outlines a process for buying and selling shares in a company.

A buy-sell agreement establishes rules around how shares or membership interests in a business can be transferred, purchased, or sold. It also determines the value of shares for buying or selling, which helps avoid disputes.

The agreement also helps ensure a smooth ownership transition and business operations continuity. It gives you an exit strategy and a mechanism to pass on control of the company to existing owners or family members when you retire or leave the business.

Common provisions in a buy-sell agreement include:

  • Triggering events: Retirement, disability, or death can often trigger a buyout. 
  • Valuation method: How the interests in the company will be valued when a buyout is triggered.
  • Funding: How will the buyout be funded? Life insurance is commonly used.
  • Dispute resolution: The mechanism to resolve any disputes over the agreement.

If appropriately structured, a buy-sell agreement can be an effective way for business owners to plan for the future and address potential issues before they arise. Speaking with a Kansas City business law attorney is a great way to draft an agreement tailored to your company's unique needs.

Events that Might Trigger Buy-Sell Agreements

  • Death: Upon the death of an owner, their interest in the business must be transferred. A buy-sell agreement specifies how and to whom the interest will be transferred to avoid disputes between surviving owners and heirs.
  • Termination of Employment: When an owner leaves the business, their interest must be addressed to avoid issues with a former owner still having a stake. A buy-sell agreement may stipulate that the departing owner must return their interest to the remaining owners or the business. The agreement provides a mechanism for determining a fair market value of the interest at the time of departure.
  • Bankruptcy: If an owner declares bankruptcy, their interest can risk being seized as an asset. A buy-sell agreement protects the business from being taken over by creditors and allows the remaining owners to maintain full control.

Contact a Kansas City Business Law Attorney Today

A buy-sell agreement is a contract between business owners governing business-interest sales. Given the complexity of these agreements, you should consult an attorney to review or draft your buy-sell agreement.

PathGuide Law can help ensure your business's agreement is comprehensive, enforceable, and protects your interests. Contact us today, and let us handle your organization's legal concerns.

Contact PathGuide Law Today
PathGuide Law is ready to take on your business’s legal concerns, so you can focus on doing what you love most. Contact us today to get started on your case.