What is a buy/sell agreement?
A buy/sell agreement is a legally binding agreement created between co-owners of a business to govern what happens in the situation that a specific event occurs. This could be, for example, a co-owner dies, chooses to leave the business, or is otherwise forced to leave the business, though ill health, a divorce or a long-term disability.
The agreement is usually structured so that subject to certain events relating to the departure of an owner, the continuing owners are given the option – or in some cases are obliged – to purchase the interest of the departing principal.
Why a buy/sell agreement is important
The potential consequences of an unexpected exit of a principal can be unfavourable for the sustainability of the business.
There are three main reasons why co-owners of a business should ensure they have a buy/sell agreement in place:
- No one can know when a death or a traumatic event will occur, and often there is insufficient capital available for the remaining owners to buy out the exiting principal without suffering financial hardship. These agreements are routinely backed by insurance policies purchased and paid for by the business – meaning funds are available in certain circumstances to minimise the financial impact on the business.
- If one of the owners in a business dies, significant commercial difficulties can arise. For example, the business might continue to operate for the primary benefit of the exiting owner’s family, even though others are undertaking all the work. Or the deceased owner’s spouse may wish to become involved, despite being unskilled, and could potentially have adverse consequences on the business.
3. A buy/sell agreement deals with the value and valuation of the equity in the business from the outset, avoiding the awkwardness and unpleasantness that can accompany buying out an exiting principal or their estate.
If you are a co-owner of an existing business or are contemplating buying or starting a business with another person, speak to Clifford Gouldson Lawyers about whether a buy/sell agreement could be to your and your business’s benefit.