How a Buy-Sell Agreement Can Protect Your Business Interests
When you’re one of a number of owners of a business, there are many legal measures that you can (and should) take to protect your personal and business interests. One of the most important is the preparation and execution of a buy-sell agreement.
What Is a Buy-Sell Agreement?
A buy-sell agreement is a valid and enforceable contract that sets forth the details of what will happen if certain situations involving business owners occur. Typically, buy-sell agreements identify the procedures that will be followed in the event of retirement, termination, divorce or insolvency of a business partner or co-owner. Buy-sell agreements are customarily in writing and may include all or some of the owners as parties.
When Is a Buy-Sell Agreement a Good Idea for a Business?
A buy-sell agreement helps facilitate the orderly transfer of ownership between parties. It’s highly recommended any time you are operating a business other than a sole proprietorship.
The Benefits of a Buy-Sell Agreement for Businesses and Business Owners
The compelling reasons to put a buy-sell in place include:
- It can help identify how ownership transitions will be funded
- It can ensure that stock is not obtained by potentially problematic parties (ex-spouses or beneficiaries of a deceased owner, for example)
- It can eliminate confusion when there’s a sudden change of ownership
- It may include formulas or other means for valuing an owner’s interest upon transition of ownership
- It can include specific guidelines for removing owners, if necessary
- It will typically identify what needs to be done to maintain business continuity when there’s a change of ownership
The Common Types of Buy-Sell Agreements
As a general rule, most buy-sell agreements fall into one of two categories:
- Entity purchase agreements—Under this approach, the business assumes the responsibility for purchasing the interests of any owner who leaves the business
- Cross purchase agreements—With this type of contract, the remaining owners must buy out the interests of any departing owners
Contact MCIS Law
At MCIS Law, PLLC, in Stafford, we provide comprehensive counsel to businesses and business owners throughout southeast Texas, handling all matters related to corporate governance, including the filing of all required documents annually with the state of Texas. For a confidential consultation with an experienced and knowledgeable lawyer, email us or call our office at (346) 297-0121. We accept all major credit cards.