Start-Up Launchpad Blog

Agree on Predictability - Buy/Sell Agreements - December 22, 2011

If you co-own your business with others, you should consider a buy-sell agreement to address when an owner has the right to sell his or her interest in the business. Unless all of the owners have entered into an agreement restricting the owners' right to sell their interests in the company, any owner can sell or gift his or her interest in the business to anyone, including an outside party. An owner's interest in the business may also be transferred on his or her death or insolvency. These events may result in an unexpected partner in the business.

Business owners can gain certainty about the future of the company and its owners by entering into a buy-sell agreement.  A buy-sell agreement can require owners to offer to sell their interest to the company and/or the other owners before selling or gifting it to an outside party.  The agreement can also give the owners the right to have the company repurchase their interest on their death or disability.  

In addition to ensuring that an owner cannot sell or gift his or her interest to an undesirable or unexpected outside party, a buy-sell agreement can also be designed to address conflicts that may arise among the owners by, for example, requiring that owners who are employees sell their interest back to the company when they leave employment or giving owners the right to buy out other owners in the event of a dispute.  The agreement can also spell out the price and terms of purchase.  A buy-sell agreement can be adapted to fit an individual company's needs and is a valuable tool to ensure predictability for the company's owners.