What Is a Buy-Sell Agreement?

If your company is considering or anticipating a change in ownership, a business succession planning lawyer, like a business succession planning lawyer in Sacramento, CA, can provide a wide range of legal services including buy-sell consultations and the drafting of agreements. They can also address your concerns and answer your questions about the buy-sell process.

A buy sell agreement is one which is established between owners of a company. It specifies guidelines insofar as how the company should operate should one or more of the owners decide to leave the organization or cannot take part in it anymore, such as if they should become disabled or pass away. Your business lawyer can create a buy-sell agreement for your company, contained within your company’s organizational rules or documentation. Alternately, a business lawyer can create a standalone buy-sell agreement. Essentially, a buy-sell agreement establishes the following:

  • It makes it possible to transfer ownership of the company to another individual or individuals in an orderly and clear cut manner, regardless of the reason or trigger for the transfer.
  • It limits and controls the transfer of the company’s ownership from one owner to another.

The Type of Business Structure Informs the Content of the Buy-Sell Agreement
There are several types of business structures; primarily, sole proprietorship, limited partnership, partnership, LLC, and a corporation. Depending on the particular structure of your company, the contents of the buy-sell agreement must reflect that type. For instance, if your company is an LLC or a corporation, the buy-sell agreement must address all legally required corporate formalities when transferring control of the company to another individual or entity. A knowledgeable business lawyer will include terms in the buy-sell agreement that are lawful, and which will dictate the transfer of ownership upon the current owner’s death or incapacity due to physical or mental illness, or retirement.

A business lawyer can explain the various types of buy-sell agreements and provide guidance as to which type may best suit your company’s circumstances and reflect your goals. Here are several examples of buy-sell agreements, each of which has a different focus in terms of ownership transfer when a company owner will divest their interest due to retirement, incapacity, or death:

  • One way business agreement. The owner’s interest in the company must be purchased by an outside party.
  • Entity buy-sell agreement. The sale of the owner’s interest in the business to another business entity will be subject to the terms of the agreement, whether that entity is a partnership, LLC, or a corporation.
  • Wait-and-see business agreement. A specified business entity or company will have the first option to purchase the business owner’s interest ahead of other owners who will retain their interest in the business.
  • Cross purchase buy-sell agreement. The business owner’s interest will be purchased by the remaining business’s partners or owners.
  • Cross-purchase buy-sell agreement. In this agreement, your interest is bought out by your partners or other owners.

Understanding the scope of a buy-sell agreement can be confusing without the guidance of an experienced business lawyer. Call one today to learn how he or she can simplify this process for you.

Thanks to Yee Law Group, PC for their insight into what a buy-sell agreement is.