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What is a Buy-Sell Agreement?

Posted by Jonathan Krems | Aug 27, 2021 | 0 Comments

If you're starting a small business, and you have more than one business owner, you need to have a buy-sell (or buyout) agreement as part of your operating agreement if you're an LLC, or a part of your bylaws if you're a corporation.  Also, if you have an existing business, you should either have a buy-sell agreement separate from your operating agreement or bylaws or update your operating agreement or bylaws to include buy-sell or buyout provisions.

So, what is a buy-sell agreement?  It is not about buying or selling companies.  Rather, a buy-sell agreement is more like a pre-nuptial agreement for your business, if you have two or more owners of a business.  A buy-sell agreement will determine what happens if an owner of the company decides to leave the company, gets divorced, files for bankruptcy, becomes disabled, incapacitated, or dies.

The provisions of a buy-sell agreement are usually triggered by one or more events, such as:

·       An owner decides to leave the company;

·       A third party wishes to purchase an owner's interest in the company;

·       A divorce settlement in which an owner's ex-spouse stands to receive an ownership interest in the company;

·       Foreclosure of a debt secured by an owner's interest;

·       An owner files for bankruptcy; or

·       An owner becomes disabled, incapacitated, or dies.

Possible provisions of a buy-sell agreement can resolve various issues when an owner wishes to leave the company, such as can he or she force the other owners, or the company as a whole, to buy him out; or can he or she "sell" the ownership interest to other owners of the company (or to third parties); and what is the price of the ownership interest in the company.

There are three different reasons why you should have a buy-sell agreement as a part of your LLC operating agreement (or corporate bylaws), or as a stand-alone document:

1.   First of all, at some point in the future, one or more owners of a company may wish to leave the organization.  It is unwise to hold owners of a company hostage and forbid them to leave (although I've seen it before), but it is wise to plan for owners to depart, if their business needs change.  The company needs to plan to continue on if an owner departs.  Without a buy-sell agreement, an LLC may dissolve if a member (owner) leaves, forcing the assets to be sold and divided among the remaining members.  If the remaining members wish to continue the business, there needs to be rules to determine in advance how a departing owner is bought out, and for how much.

2.   Second, it's possible that a new member wants to join the company in the future as an owner.  Perhaps one of the existing owners has invited a third party to become a part of the organization and become an owner (this can happen in a single-member LLC).  A buy-sell agreement can control who can join the company as a new owner, and how such a person would actually become an owner of the company.  Without such a provision, an owner could potentially sell their ownership interest to an unwanted third party.

3.   Lastly, a buy-sell agreement encourages an open discussion between business partners of future expectations.  It is very important when starting a business to start on the right foot, and that includes a healthy discuss of planning for the future.  This discussion also would include the hopes and expectations of each owner for the business, making sure everyone is on the same page.

As always, when starting a new business, or considering an update to your operating agreement or bylaws, it is best to consult with an attorney.  I would be happy to provide a complimentary review of your current operating agreement or bylaws to ensure that a buy-sell agreement is included.  Please contact me at [email protected], and mention in your e-mail “buy-sell agreement” to request your complimentary review.

If you are interested in starting a small business anywhere in Oklahoma, or if you have a small business and you are looking to grow, please feel free to contact me at [email protected].  For more information about Liberty Legal Solutions, LLC, please visit our website http://www.libertylegalok.com.

About the Author

Jonathan Krems

Jonathan is the Founder and Managing Attorney of Liberty Legal Solutions, LLC, a law firm dedicated to building, protecting, and defending the business and personal interests of our clients in Oklahoma.  Jonathan's primary practice areas are business law, contracts and agreements, business liti...

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