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The Buy Sell Agreement: What is it and why is it important?

Introduction

Many new business owners overlook one of the most important aspects of starting a new business relationship: clearly stipulating how significant future changes will affect the management and control of the business. For example, what happens if your partner dies, becomes disabled, or is otherwise incapacitated? What if she files for divorce? Or bankruptcy? A well designed buy-sell agreement addresses these and other vital questions—before things get ugly.

If you don’t have a binding buy-sell agreement in place, your business is at risk. Without a clear succession plan, disputes can arise among partners—or their surviving spouses—that lead to loss of valuable time, increased expenses, and costly litigation. That’s why I cannot stress enough the importance of having a buy-sell agreement in place from the outset of any business relationship involving two or more people.

Fortunately, putting together an effective buy-sell agreement is not difficult. In this document, we address common “who, what, when, where, and why” questions that arise in a typical buy-sell agreement. Other names for this agreement include shareholder agreements or succession agreements. In the sections below, we’ll explain in detail what a buy-sell agreement is, how it benefits business owners, and why it’s so important to have one—even if your business partner is your best friend. We’ll also provide a checklist that will help you or your client gather all the information you need to implement a standard buy-sell agreement.

Table of Contents

  1. What is a buy-sell agreement?
  2. Why have a buy-sell agreement?
  3. Primary types of buy-sell agreements.
  4. Which type of buy-sell agreement is appropriate?
  5. Transfer restrictions.
  6. Triggering events.
  7. Determining the purchase price.
  8. Additional tax considerations in funding the purchase obligation.
  9. Some issues by entity
  10. Estate planning consideration.
  11. Use of life insurance.
  12. Community property considerations.
  13. Minority interests.
  14. Bankruptcy considerations.
  15. Buy-sell agreement checklist.