What Is a Buy-Sell Agreement and Why Is It Vital for a Successful Partnership?

If you are starting a business with a partner, you need to have a buy-sell agreement

By | Adam Horlock |

For entrepreneurs starting or building a business with a partner or partners, one of the must-haves is a buy-sell agreement. This agreement establishes protection for all parties and the company should something happen or if an exit occurs for one of the business partners. Without such an agreement, many variables can emerge, such as a family member or other party that takes ownership or a controlling stake, and perhaps without any initiative for success. 

Evaluate and Ensure Fair Value for the Business

A buy-sell agreement ensures the stakeholders all agree on the business’s fair value either by the total value or through earnings, sales, and assets. The agreement prevents any unfortunate events in the future where questions arise on valuation. This part of the agreement needs to be continuously updated, as each business’s valuation will change over time. Be careful in another area of how the valuation clause in the contract is worded, especially between what is considered a “fair value” and a “fair market value.” Other terms can also have different implications on the actual value understood by the business ownership, attorneys, financial advisors, and other parties during a triggering event of a buy-sell agreement. 

Provide a Structure for the Agreement 

Many businesses have chosen various structures for a buy-sell agreement. However, there are two common structures used, an entity-redemption or a cross-purchase structure. Simply put, an entity-redemption structure ensures the business holds the liability to purchase the ownership stock or interest of the partner leaving the company.

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