9 Purposes of a Buy-Sell Agreement

9 Purposes of a Buy-Sell Agreement

What is a buy-sell agreement?

A buy-sell agreement is a legal contract that governs situations where a business owner dies, divorces, files bankruptcy, becomes incapacitated, retires, or otherwise leaves the business. Without a buy-sell agreement, what happens to the business owner's interest in the business? Buy-sell agreements reduce tax complications, estate complications, and legal complications. Buy-sell agreements are a necessity for each and every business.

What are the purposes of a buy-sell agreements?

  1. Right of First Refusal. This clause provides current shareholders with the option, and procedure, to buy back shares of another shareholder who desires to sell;

  2. Come-Along, Bring-Along, Drag-Along Clauses. These clauses will essentially force minority shareholders to participate in the sale of shares. Generally this occurs when the company is seeking venture capital. These clauses make the company more marketable and provide for necessary exit-strategies;

  3. Required Percentages. This clause will determine the required percentage of votes to issue additional shares.

  4. Dispute Resolution. These clauses establish rules allowing for dispute resolution;

  5. Governing Choice of Law. This indicates what laws will govern your buy-sell agreements;

  6. Shareholder Death/Termination. These clauses can require that upon the death of a shareholder or termination of an employee, his or her shares will be repurchased by the company. They can also determine a process for valuing the owner's share interest;

  7. Divorce or Bankruptcy. Provides methods to avoid disruption of business operations by establishing procedures that require the sale of ownership interests;

  8. Future Share Prices. A corporation can use this clause to provide a "formula" for determining the purchase price of future shares, including current market conditions; and,

  9. Funding Sources. Provides a more liquid funding source, like insurance policies.

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*There are many purposes to a buy-sell agreement; however, this article is primarily focusing on corporations and shareholders. The information provided in this post does not constitute legal advice or opinion. The information is for guidance purposes only. Individual situations vary and you should contact us for a consultation.  Sacramento's business attorney's discuss 9 Purposes of a Buy-Sell Agreement. 

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