Why You Need a Buy/Sell Agreement
Mar 02, 2010
The buy/sell agreement is one of the most important tools for maintaining the integrity of a business entity. A properly written and executed buy/sell agreement will:
- Prevent inactive owners from gaining an ownership interest
- Ensure ownership continuity in case of death, disabilty, dissolution and divorce
- Provide a ready market for business interests
- Possibly establish a business value for estate settlement purposes
A buy/sell agreement should be in place for every business entity held by multiple-owners. At the most basic level, it provides a ready market for selling an ownership interest, establishes a valuation method and spells out the terms and conditions of purchase without placing a fractional owner in an unfair bargaining position.
A buy/sell agreement also restricts an owner’s ability to transfer a business interest. The typical agreement spells out the terms, conditions, triggering events and valuation methods under which owner’s interests may be sold.
All owners of a business agree to the triggering events and provisions that a buy/sell agreement will cover---including death, disability, retirement, dissolution, withdrawal prior to retirement, and other circumstances (divorce, bankruptcy, legal judgment, etc.).
Owners must be mindful that the provisions of a buy/sell agreement can be written as an option or as an obligation. In other words, each triggering event will either create an option to purchase or an obligation to purchase.
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