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By Sanjeev Kumar
Founding Attorney

There are many business legal tools and agreements that may not be required, but can still be critical to the longevity of your business. A buy-sell agreement is one such item. A buy-sell agreement can protect business partners in the event that there is an impending change in leadership, like when one partner passes away or chooses to leave the business. This can mark a make or break time for a business. Weathering leadership transitions can be essential to the ongoing success and growth of a business. Here, we’ll take a closer look at what a buy-sell agreement can accomplish and why you should consider having one in place for your business.

Do You Need to Have a Buy-Sell Agreement in Place?

A buy-sell agreement is also referred to as a “buyout agreement,” as it sets the terms for buying out an exiting partner’s shares in the business. It details how the partner’s shares will be sold as well as who can buy those shares and at what price. To help ensure that the buyout of the exiting partner’s shares can actually happen should the need arise, many buy-sell agreements come with funding provisions like an insurance policy that would cover the cost in the event of a buyout. Other provisions can also be added to a buy-sell agreement in order to limit personal liability exposure of the business partners and shift said risk to the business itself.

Should a business partner leave unexpectedly or even when there is plenty of notice of a partner leaving, the transition period can be taxing on a business and its remaining partners. There may be disputes as to who owns the partner’s shares. There may be disputes as to who can buy the shares and the value of the shares. A buy-sell agreement can clearly set forth these terms so there are no discrepancies when such a situation arises. The agreement can also contain a provision preventing a departing partner from selling their shares to another company, which could possibly even be a competitor.

Without a buy-sell agreement in place, leadership transition periods can place the business in danger of failure. Without a plan and funding in place for a buyout, the company itself may be at significant risk of dissolution or liquidation. With a buy-sell agreement, the risk of this occurring is minimized by providing a plan for such an event. While a buy-sell agreement may not be required of a business, it is certainly good idea to have one in place to help ensure the continued success of your business and to minimize potentially big headaches down the road.

Business Law Attorney

Are you considering a buy-sell agreement for your business? The Kumar Law Firm can help draft an agreement that protects and promotes the best interests of the business and its partners. Contact us today.

About the Author
Sanjeev Kumar is the founder and principal at the Kumar Law Firm, which provides a wide range of legal services to entrepreneurs and business owners in the area of business & corporate law and intellectual property along with related areas of interest to clients such as business succession planning, wealth preservation through estate planning, and alternate dispute resolution.