The buy/sell agreement may not be familiar to individuals who have just started their business or are working on their own however, these agreements are an important way of controlling the outcome of the business. The basics of the agreement are straightforward, the agreement sets out how an owners share of the business may be assigned or transferred if the owner dies or wants to leave the business. The agreement serves to smooth the changes that might occur if one of the four D’s happen. In the case of death, divorce, dissolution, or disaster, the agreement lays out how the business ownership will work moving forward.

There are a few different ways that these agreements may be setup. First, the agreement may require that the remaining owners purchase the shares of the departing owner. Second, the business may purchase the ownership interest of the departing owners, this happens more often with closely held corporations than partnerships or LLC’s. Depending on what the owners of the business want, they may opt for a mix of the two options.

It is important to know that there are several reasons that a business may need a buy/sell agreement even if things are going well and there doesn’t seem to be any reason to use one. One of the big reasons is that it allows the owners to restrict who may become an owner. It is very common that small business owners are concerned about the possibility that a new owner will push the original owner out of control. When an owner dies, a restriction on who becomes the new owner can prevent the deceased owner’s estate from selling, transferring or otherwise controlling the business when the estate does not have the same focus on the success of the business that an original owner may have had. Additionally, the agreement creates an impartial method of determining the value of the departing owners share of the business. Instead of allowing the remaining owners and departing owner from arguing and possibly destroying the business, a valuation method creates the separation necessary to conduct an impartial sale of the departing owners share or another transfer free of the concerns that might hinder or destroy a sale.

It is important to remember that along with many other business transactions, a buy/sell agreement must be funded by the owners or the business. Problems frequently pop up where an agreement states that the business or an owner will buy the shares of a departing owner yet the buyer does not have the money available to make the purpose. This may result in the becoming stale and eventually unenforceable. Or the buyer may be saddled with debt that makes them insolvent, which in turn kills the business and forces the individual owner or business into bankruptcy. To avoid this problem companies often rely on insurance policies in the case of the death or disability of an owner, or they use cash proceeds and or borrowed money to buy the departing owner’s share.