What is a Buy-Sell Agreement?

A buy-sell agreement is a contract that establishes the right of joint owners of a business to have the first option to purchase the portion of other owners in the event that one of their number is unable to retain control of his or her share of the company. A pact of this type helps to clear the way for the orderly and efficient transfer of a portion of the ownership, without causing any type of interference or upheaval in the day to day operation of the business. Most jurisdictions require that this sort of agreement must be somewhat specific in the conditions that must exist in order for the sale between owners to take place.

The primary benefit of a buy-sell agreement is that the contract prevents a joint owner from selling out to a party that may be objectionable to the other owners. By retaining the right to purchase one owner’s share of the business, it is possible to make sure that no one gains an interest in the company that could potentially disrupt or even cripple the operation. From this perspective, the buy-sell agreement helps to protect the stability of company, a fact that most shareholders as well as employees are likely to appreciate.

When it comes to the terms and conditions that are included in the text of the buy-sell agreement, it is not unusual for the provisions to be highly detailed. Most agreements of this type will address the issue of what takes place when one of the joint owners should die suddenly. In this instance, the joint owners can work with the estate or the deceased partner’s beneficiaries to arrange for the equitable purchase of his or her share of the business. In theory, this will provide an advantage to beneficiaries who do not wish to be involved with the company, as well as ensure that the owners do not have to deal with someone who is not familiar with the general operation.

Other situations can also be covered in the terms of a buy-sell agreement. For example, the contract may specify that in the event of a financial reversal on the part of a joint owner, the other owners have the first option of purchase of his or her share of the business. Should one owner become physically or mentally unable to function as an owner, the remaining owners may buy out his or her interest in the business, paying the current market value for that portion of the company.

Many examples of a buy-sell agreement will also include a generic clause that covers any situations that are not specifically addressed within the contract provisions. This means that a joint owner who simply tires of the business must offer his or her portion to the other owners first. Should the other joint owners choose to not purchase the portion, the owner is then free to seek interested buyers outside the current company ownership structure.