Buy-Sell Agreements - A Must for Partnerships

8/15/2016 - By Zachary Farrington

If you’re a business owner, you’re an optimist. And as an optimist, you might assume that you and your partners will have smooth sailing for as long as your company is in business.

But things happen. Co-owners could become incapacitated or even die unexpectedly, and couples could get divorced. For these and other reasons, you and your partners need a buy-sell agreement. This is a written contract detailing how and when a partner can sell his or her business interest.

Also known as a shareholder agreement, a buy-sell agreement is essential for every business with two or more partners. It outlines exactly what will happen if an owner wants or has to sell his or her interest in the company.

The agreement defines the types of events that will trigger buying or selling: death, disability, divorce or a partner’s bankruptcy, for example. It also spells out how the partner’s interest will be valued. Many agreements include a formula for valuation and may even dictate who will do the valuation.

One of the most important elements of a buy-sell agreement is a description of the parties to whom the interest can be sold. If your co-owner dies or divorces, do you want his or her spouse, ex-spouse or children to be your new partners? Probably not, which is why this part of the agreement is so essential. To ensure continuity of ownership, it’s typically agreed that the remaining partners will buy a deceased or divorced partner’s interest.

Many agreements also dictate how the interest will be paid for, such as by using the proceeds of a life insurance policy payable to the other partners.

If you don’t currently have buy-sell agreement, ask your lawyer to draft one as quickly as possible. If you so have an agreement, take the time to review and update it regularly.