Quick Primer Buy-Sell Agreement
By Chuck Roach
-Roach Law Office
A buy-sell agreement is an important part of properly protecting your business and the interests of the owners. Sound business planning dictates that a buy-sell agreement be used in any business structures (corporation, LLC, partnership, etc.).
The buy-sell agreement is a form of “prenuptial agreement” among owners of a business venture. It is designed to protect each of the owners from having ownership interest transferred to a third party without their approval or consent. In cases in which one owner desires to sell his shares, it prevents an owner from doing so without the consent of the other owners, or without the opportunity to allow the other owners to buy the shares first. It also provides surviving owners with control over shares, in the unfortunate event that one of the owners passes away unexpectedly, or becomes disabled.
The agreement usually takes one of three forms:
• Cross-Purchase Agreement — In this form, a withdrawing owner agrees to sell his interest to the remaining owners. It is suitable for the small business with only a few owners. As the number of owners increase, this form can become unwieldy. In a larger business or if the individual members prefer, an entity-purchase agreement may be more suitable.
• Entity-Purchase Agreement — In this form of the buy-sell agreement, the withdrawing owner agrees to sell his interest to the entity, which then retires the ownership interest.
• Hybrid Agreement — This form is a combination of the first two. Typically, the withdrawing owner must first offer his ownership interest to the entity. If the entity declines or is unable to make the purchase, then the shares must be offered to the other owners.
The purchase of shares from a deceased or departing owner can be accommodated through the purchase of insurance for this purpose. For start up or young companies, such insurance may not be necessary, as long as the owners agree that payments can be made over time.
As with any planning for businesses, the time to prevent disputes or problems is before they occur. Dealing with the contingencies of a deceased or disabled owner, or the simple desire of an owner to sell his shares to a third party, can be made much simpler via use of a buy sell agreement. Legal fees as well as sleepless nights will be minimized if owners agree to the “What Ifs” well in advance.
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