When multiple individuals own a business, planning for future transitions is essential. If one partner departs, dies, or wants to sell their ownership interest, the absence of a formal agreement can create legal and financial complications. A buy-sell agreement helps manage those transitions with clarity and structure.
Clarifying the agreement’s role
A buy-sell agreement outlines what happens when an owner exits the business. It establishes who may purchase the departing owner’s interest, how the valuation will be determined, and the timeline for the transaction. You should implement this agreement early to avoid future disputes and maintain business continuity.
Choosing the structure
There are several ways to structure a buy-sell agreement. In a cross-purchase agreement, remaining owners buy the exiting owner’s shares. A redemption agreement places that responsibility on the business itself. Some businesses use a hybrid of the two. The right structure depends on how you plan to fund the buyout and who should control the interest going forward.
Determining ownership value
Valuation is often the most contested issue during ownership transitions. A well-drafted agreement should include a reliable method for determining the business interest’s worth. This may involve a fixed price, a revenue-based formula, or an independent appraisal. Having a consistent approach minimizes uncertainty and conflict when the agreement is activated.
Defining triggering events
Buy-sell agreements go into effect after specific events, often called “triggering events.” These include an owner’s death, divorce, disability, retirement, or voluntary exit. By clearly identifying these events, your agreement ensures a smooth transition and preserves the business’s operations and relationships during potentially disruptive times.
As your business evolves, your agreement should evolve too. Review and update it regularly to reflect changes in ownership, financial status, or business goals. A buy-sell agreement works well when it stays current and relevant.
