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The Importance of Buy-Sell Agreements

Date: 03/29/2007 | Category: Business | Author: Diana Heeb Bivona

A buy-sell agreeement is a legal document that explains how a company or its owners will redistribute ownership shares after one of the owners dies, becomes disabled, retires or otherwise leaves. The primary goal of the agreement is to avoid conflict and confusion by keeping ownership and control in the hands of those individuals who will be responsible for managing the operations of the business.
When drafting or reviewing your company’s buy-sell agreement, consider address the following:

  • Review your buy-sell agreement once each year. This allows you to takes into account changes in your personal circumstances or in the business itself.
  • Draw the distinction between ownership and employment. Often in the beginning stages of a company’s life, the lines between ownership and employment are often blurred. It is important to not only separate the benefits of ownership from those of employment, but to think about how one may effect the other in the event of change.
  • Specficially address various circumstances. Ensure your agreement very specifically details what happens when: death, voluntary departure and involuntary departure occurs of one of the owners.
  • Ensure specific language regarding valuation of shares under various scenarios. For example, what’s the value of the shares if outside investment was sought and must be addressed or if one party has less than a 100% interest in the business?
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