A buyout agreement, also known as a buy-sell agreement, is a contract among co-owners of a business that addresses what happens when an owner leaves (voluntarily or involuntarily). While your situation might feel solid now, the future holds the possibilities of death, retirement, business relationships going sour, and other circumstances that will affect the ownership of the business. If you want your business to continue after an owner leaves, or you are interested in avoiding conflicts over the terms of an owner’s departure, you should draft a buyout agreement.
No business is legally required to have a buyout agreement. However, most businesses benefit from an agreement, including sole proprietorships, partnerships, LLCs, and corporations. Buyout agreements are more common in multi-owner companies than single-owner companies, as a motivating factor in creating a buy-sell agreement is ensuring that a co-owner does not sell his interest to someone the other owners do not want to work with.
However, owners of sole proprietorships and single-member LLCs can also benefit from buyout agreements. The agreement can provide a process for third parties to purchase the company from the owner or the owner’s estate, allowing the business to continue if the owner retires, becomes incapacitated, or dies.
The buyout agreement includes details about what happens when an owner leaves the business. The law does not require any specific provisions, and the more you can include in the agreement, the better prepared you will be if an owner leaves. Common provisions in a buy-sell agreement include:
A buyout agreement will list the events that will trigger a buyout, meaning an owner will leave the business and others will purchase the ownership interest or shares. These events might include:
Your agreement can be a stand-alone agreement or part of another business document like a partnership agreement or an operating agreement. Often you will create the agreement soon after forming the company, or you might draft the agreement months or years later. You do not file the agreement with the state (as you do some business formation documents). All owners must review and sign the agreement. Provide all owners with a copy, and keep a copy on file with your company’s records.
You should periodically review the document as your business grows and when you bring in new owners. When you update the agreement, have all the owners review and sign the updated document.