What is a Buy-Sell Agreement?

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.