Five Decades Of Legal Excellence

What is in a good buy-sell agreement?

On Behalf of | Feb 14, 2022 | Business Law

When first starting a business, Virginia entrepreneurs need not only investment resources, marketing research and a client base, but also a backup plan should something occur that could put the enterprise at risk. Planning for the unexpected, such as a partner or shareholder leaving the company or falling ill, is an essential part of ensuring the future viability of the company.

Which is why most businesses that are not sole proprietorships include a buy-sell agreement as part of their arsenal of legal documents that come with entity formation. A well-crafted buy-sell agreement protects the company should a partner or owner leave. Richmond business owners who want to create a solid foundation for their enterprise will benefit from effective legal advocacy to represent their interests when drawing up contracts and other essential documents.

What does a buy-sell agreement include?

Also called a “buyout” agreement, a buy-sell agreement is a contract between shareholders that limits their actions in the sale or transfer of shares in the event that they leave the company. By limiting the actions of the shareholder, the company and other shareholders will not be burdened with the instability that might otherwise occur with their departure.

Whether it is a closely held business or a larger entity, a buy-sell agreement limits the actions of the departing shareholder regarding the sale or transfer of shares. It does not, however, cover the purchase or sale of the company.

Some essential contingencies of a good buyout include:

  • Provisions for who may buy a shareholder’s stock
  • Whether or not the company must buyout the departing shareholder
  • The method for determining the value of the shareholder’s interest
  • The payout terms

The agreement keeps an unwanted buyer from obtaining interest in the business, while defining how the shareholder can dispose of their ownership interest. The agreement should also define certain events that could trigger a buyout of the departing shareholder, such as the shareholder’s:

  • Retirement or death
  • Termination of employment
  • Disability
  • Personal bankruptcy
  • Divorce

How would the business pay for the buy-sell?

The agreement should stipulate how the business will finance the buyout. Businesses often pay for a buyout by using the company’s assets and then paying the balance back with future earnings. Most buyouts, however, are funded through life insurance policies.

A buy-sell agreement is usually included in the articles of incorporation or in the bylaws, but it can also be a stand-alone document.