Commercial law

How a Buy Sell Agreement Works

Running a business, whether it is large or small, necessitates the use of a variety of different legally binding contracts. One that is almost guaranteed to come up if there is more than one owner of a business is a buy sell agreement. This can also be thought of as a business will or a business prenuptial agreement of sorts, that helps dictate what happens should one of the owners die or if the co-owners should decide to part ways at some point and the company has to be divided up.

Some of the factors that will go into a buy sell agreement include a division of the assets. In addition, this document will specify who is allowed to buy the deceased or departing partner’s share of the overall business. In some cases, this will only be their immediate family, and in others that could include outsiders or fellow shareholders. There are no set rules to how to divide this up, which is why an agreement must be drawn up ahead of time to set these guidelines. Otherwise, divvying up shares and assets at the time of departure could turn into a prolonged legal nightmare.

Another factor to consider is what the price will be for these assets or shares. It also makes sense to specify this ahead of time, along with who is able to purchase, just to avoid confusion. A buy sell agreement will also lay out the types of events that could cause the buyout. This list will most commonly include death, retirement, the owner leaving a company, or some sort of disability. However, anything that the business owners can think might be an issue down the road could also be included in this list of possible triggers.

All of these systems must be put into place ahead of time to avoid the chaos and legal battles that will occur should a business partnership end badly. This is why the buy sell agreement is also compared so frequently to a prenuptial agreement or will, because it covers both of these types of happenings. Before drafting a document that is legally binding, it is highly recommended to speak to a business lawyer about how to best draft this document in language that is the most beneficial to everyone in the business. No matter how many shareholders there are at the time of drafting it, it’s important to make sure everyone feels good about the written agreement.