If a person is new to business, they may not know what a buy-sell agreement is and how it applies to their operations.
Buy-sell agreement overview
A buy-sell agreement is sometimes also called a buyout agreement and it is used by business owners to plan for future ownership if a certain event occurs, including death, retirement, disability or when a co-owner of the business leaves. It addresses how a share of the business should be reassigned when that event occurs.
The agreement should include several parts. There should be a clearly defined event, a valuation method, an identified buyer, a funding source, payment terms and restrictions on the sale or transfer of owners’ interests.
There are several disagreements that can arise with buy-sell agreements. Parties can dispute the fair market value of a business, specifically if one believes that the business is worth more than the agreement states and the other believes it is worth less.
There can also be disagreements about how to manage external financing, whether the event that triggered the buy-sell agreement occurred, and whether a retirement decision meets the criteria to re-assign that person’s share of the business.
It is important to have a well-drafted, clear buy-sell agreement to avoid misunderstandings and miscommunications between the parties. It’s also helpful to revisit the buy-sell agreement from time to time because circumstances can change that affect the agreement’s applicability.