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Important considerations in buy-sell agreements

On Behalf of | Jan 20, 2021 | Business Law, Buyout Agreements

When forming a business entity, whether it is a partnership, a limited liability company or a corporation, it is always good to have a contingency plan in place. Planning for the unexpected, like when a partner leaves the company or falls ill, is crucial for keeping the business viable.

This is why businesses that are not sole proprietorships include a buy-sell agreement during the formation of the entity. A well-written buy-sell agreement will keep the business running smoothly in the event that a partner or owner leaves.

For the New York City business owner or entrepreneur wishing to have a solid foundation for the business, it is important to have a skilled business law attorney to review or draw up important documents to ensure that the business is on the right track.

What the buy-sell agreement covers

A buy-sell, or buyout, agreement does not cover the purchase of sale of the company. Instead, it is a contract between shareholders. Whether it is a small closely held company or a larger entity, the buyout agreement limits a shareholder’s actions regarding the sale or transfer of shares if he leaves the company. This protects the business and the other shareholders from any complications if another shareholder departs.

A good buy-sell agreement should include:

  • If the company will buyout the shareholder
  • Who may buyout the shareholder’s stock
  • How to measure the value of the shareholder’s interest
  • Payout terms

The agreement prevents an unwanted buyer from obtaining an interest in the company, and also outlines how the shareholder can dispose of their ownership interest.

Events that trigger a buyout

A good buyout agreement identifies the events will initiate a buyout:

  • personal bankruptcy
  • death or retirement
  • divorce
  • disability
  • termination of employment

Funding the buyout

A buyout agreement will stipulate how the company will handle the buyout. Companies sometimes pay for a buyout by directly using assets of the company and paying the balance back with income earned over time. More often, however, they are funded with life insurance policies.

Buy-sell agreements are usually included in the articles of incorporation or the by-laws, but they can also be stand-alone documents.