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Prepared By: Melissa C. Marsh, Los Angeles Business Attorney
Written: May 2006

Buy-Sell Agreements.

A buy-sell agreement is a binding contract between co-owners of a company that establish policies for dealing with major disputes, an unforeseen divorce, an untimely disability or death, bankruptcy, and even the plain desire for one of the owners desire to quit the business, or sell his or her interest in the business. Often buy-sell agreements contain terms that control when and how owners can sell their interest, who can purchase their interest, and what price will be paid.

Every co-owned business (whether a partnership, corporation, or limited liability company) needs a well drafted buy-sell, or buyout, agreement. The best time to set up a buy-sell is when you start-up the business. And while it is never too late, the longer you wait the more complex and expensive it can get. Every day that value is added to the business without a plan for future transition, it increases its financial risk. And, while co-partners may get along great when they form a business, things can, and often do, change.

Only by planning, can multiple owners be assured of a smooth transition and certain guarantees if one of the above life events occurs. If one of the owners dies or become disabled, a buy-sell agreement can provide for an insurance funded payout. If divorce is a possibility in the future, the buy-sell agreement can require the former spouse of a divorced owner to sell any interest received in a divorce settlement back to the business, or other co-owners pursuant to the pre-determined valuation method provided for in the buy-sell agreement.

If one of the co-owners declares bankruptcy, a well drafted buy-sell agreement can prevent a bankruptcy trustee from liquidating (selling) the business to pay the bankrupt owner's debts.

If a major dispute between the owners cannot be resolved amicably, a buy-sell agreement can provide a fair mode and means for a buy-out of one of the owners' interest at a pre-determined value.

In essence, a buy-sell agreement enables partners and shareholders of a corporation to agree, in advance, to the terms and conditions of a future sale or to smooth the transfer of an ownership stake under certain triggering events such as a desire to retire, to merely go in a new direction, a need to declare bankruptcy, an unforeseen divorce, and even an untimely disability or death. A buy-sell agreement can also provide a framework for establishing the purchase price of a business interest at any given time.

Related Articles:

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• Buy Sell Agreement For Shareholders of a Corporation
• How Is An Owner's Interest Valued In A Buy-Sell Agreement?
• How Is An Owner's Interest Purchased In A Buy-Sell Agreement?
• Why You May Need To Update Your Buy-Sell Agreement?
• What happens if the company needs to buy out an owner, or owner's spouse, but can't afford to?

© 2006 Melissa C. Marsh. All Rights Reserved.