March 17, 2022

Basics of Buy and Sell Agreement

Though we can’t predict the future, we can do our best to plan and prepare for life’s many curveballs. This is especially important if you run a small business.

What’s more, if you “co-own” a business with a friend, investor, or business partner, it’s even more important that you have a legally binding contract in place to protect the future of the company, its assets, and brand reputation.

To put it simply, if you or your partner were to pass away; become unable to manage your company due to an injury, medical condition, or disability; retire, or leave the company entirely, you need a plan in place to keep the doors open, the lights on, and the business protected.

A smart way to do this is to have an experienced business attorney draft you a buy-sell agreement.

What Is a Buy-Sell Agreement? 

A buy-sell agreement is a legally binding contract that outlines a company’s course of action if a co-owner dies or leaves the business for any reason.

Before entering into any business partnership, you want to have an agreement drafted, signed, and filed by your attorney. However, if you have been co-running your business for years without one, it’s not too late to meet with an attorney and have one drafted. 

Just remember, you don’t want to wait any longer!

Why Are Buy and Sell Agreements Important? 

The easiest way to understand the importance of a buy-sell agreement is to think of it as a contingency plan for your business.

It outlines how the owners will value, transfer, and protect their stock within the company should an unexpected event occur (such as a death or injury) that could leave one of you unable to perform essential business responsibilities. 

The agreement, itself, provides a plan of action (or next steps) for the company and owners to take, which means your operations (and customers) won’t be impacted, as a result. 

Is a Buy and Sell Agreement the Same as a Buyout Agreement?

Your buy-sell agreement can outline the requirements and procedures necessary for a buyout to take place, thus giving you more control over the buying and selling of the company. 

For instance, in the event that one of you passes away, the agreement may govern that the living owner has the right to purchase the co-owner’s share of the business (and may include the agreed-upon price for the buy-out). 

This means you retain full control of the company, without it going into the hands of the deceased’s spouse or family. It also identifies who your partners can sell their shares to and for how much.

Having this agreement in place before the business opens ensures the owners have a strategy for addressing these issues before they become a larger problem.

Types of Buy and Sell Agreements

The three basic types of buy-sell agreements include:

1.) Redemption Agreement 

The business is required to purchase the departing owner’s share.

2.) Cross-Purchase Agreement

The remaining owners are required to purchase the departing owner’s share.

3.) Hybrid-Agreement

The departing owner’s shares are first offered to the other owners then the business must purchase them.

A Final Note on Buy and Sell Agreements

Without an agreement in place, you run the risk of damaging your company’s reputation, disrupting sales/production, and not being compensated for your shared assets—should you decide to exit the business. 

Here are a few other ways a buy-sell agreement can protect you, your family, and your company’s future:

  • Market Value: If you or your partner’s family are suddenly forced to find someone else to purchase the business, the sale price will likely fall below the company’s estimated worth.
  • Closed Doors: If your partner passes away or becomes disabled, you may find yourself contesting your rights as the owner of the business. This means you’ll spend more time in court and less time running the business. And if your company suffers as a result, you may find out there’s no business to return to in the end.
  • Fair Compensation: If you don’t have an agreement that specifies a buyer for the business, or how much the company can be sold, you may not receive fair compensation for your share of the business once the company is sold. And if you are the one who passes away, this can also affect the compensation your family would receive in your absence.

If you don’t have a buy-sell agreement in place, the time to draft one is now. Even if you do have one, it’s always a good idea to have an experienced business attorney review the agreement to ensure it follows all state and federal guidelines to be considered “legally binding.”

Need Help Drafting Your Business Agreements?

Contract drafting can be challenging and time consuming. But at KTF Law Firm, you’ll find the support and legal services to help safeguard your investments and company’s future. 

To learn how we can help, contact our Minnesota law firm today. We offer free, no-obligation consultations to help you find the answers you need, so you feel confident taking the next step in your business venture. 

Contact us for support!

Three business owners talking in building about setting up a buy sell agreement.
Share with a Friend