Burkhalter Law – Buy-Sell Agreement

A Buy-Sell Agreement is a legally binding contract that outlines the procedures for transferring a partner’s ownership stake in a company under various circumstances, such as death. Typically, it dictates that the departing partner’s share be sold either to the remaining partners or to the partnership itself. Often, life insurance policies are employed to finance this buyback if a partner passes away.

When do I need a Buy-Sell Agreement?

A Buy-Sell Agreement is crucial for ensuring a smooth transition of business interests in predefined situations. It serves several essential functions:

– Guarantees job stability for remaining minority owners and key non-owner employees.

– Creates a market for the departing owner’s business stake, which might not exist without such an agreement.

– Prevents disruptions in business management and control.

– Compensates the survivor of a deceased owner for their share of the business.

– Enables surviving owners to swiftly acquire a deceased owner’s share, avoiding probate and the risk of a new voting owner.

– Establishes a predefined value for an owner’s interest, minimizing potential legal disputes.

– Defines the exact ownership stake of each owner in the business.

Types of Buy-Sell Agreements:

Buyout agreements are utilized by businesses with multiple owners and come in several forms, such as:

1. Shareholder Buyout Agreements (for corporations).

2. LLC Owner Buyout Agreements.

3. Partnership Buyout Agreements (for various types of partnerships).

These agreements have common elements but can differ significantly in terms of rules and procedures, especially regarding share valuation and trigger events. Buy-Sell Agreements can also be embedded in a company’s governing documents, depending on its structure.