What is a Buy-Sell Agreement?

Investors should think about what will happen to their businesses or investments when they retire, die, or get incapacitated. A buy-sell agreement allows an investor to identify the events that may trigger the sale of their shares in a business.

The agreement establishes a clear plan of the ownership transition when a partner chooses to leave the business or passes away. The buy-sell agreement may stipulate that a share of the business be sold to specific partners or shareholders of the company.

What a Buy-Sell Agreement Entails

Buy-sell agreements can be different depending on the type of business, and the main purpose is to help identify the sources of conflicts and provide a plan in case conflicts arise. Some of the details to add to the buy-sell agreement include:

• Factors that trigger buy-sell agreements
• Valuation of ownership interests
• Terms of funding buyouts

Events that Trigger Buy-sell Agreements

The buy-sell agreement protects the business and other shareholders’ interests if one partner departs due to:

• Death

The interest of a deceased business owner should pass to another person after they pass away. If the heir does not want to work with the remaining shareholders, the company or the remaining owners can buy the deceased’s interests. This helps avoid passing the shares to a child or spouse who is uninterested or uninvolved in the business.

• Termination of employment

If all shareholders participate in the company’s daily operations, the termination of one of the partners or shareholders may create the need for a buy-sell agreement. The agreement can help reduce animosity among the remaining shareholders and create a market for the terminated shareholder’s shares.

• Divorce

A buy-sell agreement can help prevent legal disputes that may affect the business if a partner or shareholder divorces. It also helps prevent shareholders from transferring share ownership to an uninvolved or uninterested ex-spouse.

• Bankruptcy

If a shareholder goes bankrupt, the business or the remaining owners can buy the shares to prevent the shares from being distributed to creditors. In the absence of a buy-sell agreement, the remaining shareholders may be left in contention regarding the value of the shares and the terms of the transaction.

Since these negotiations occur during emotional turbulence, the situation can constantly lead to litigation. Having a buy-sell agreement can help avoid negotiations when tensions run high.

Contact a Texas Business Attorney

When business partners are busy running the business, it may be challenging to find time to handle some legal aspects of the business. Fortunately, you don’t have to handle it all on your own.

A Texas business attorney from the Foster Massengill, PLLC can help offer the legal support you need to concentrate on legal aspects like creating and executing a buy-sell agreement. Contact us today to learn more about how we can provide legal help.