Buy/Sell Agreements are not an agreement to buy or sell anything at the time the buy/sell is entered into. A buy/sell agreement is an integral part of every business for any type of organization, from LLC to closely held corporations to partnerships.
Buy/Sell agreements state the terms of when a business owner's share of the business may or must be sold to a co-owner or the business itself. There are two types of buy/sell agreements: First, a cross-purchase agreement, which is an agreement where the other individual owners of the business agree to purchase the business interest, and second, an "entity agreement", where the business itself agrees to purchase the business interest. A buy/sell agreement may be in the certificate of incorporation or it may be a separate agreement entirely.
Why have a buy/sell agreement? Most commonly, a buy/sell agreement is a mechanism for current co-owners of a business to ensure that a third party may not acquire any interest in the business. These buy/sell agreements arise in death, divorce, retirement, and/or bankruptcy of a current business co-owner. In these situations, a properly drafted buy/sell agreement will allow either the business itself or the individual owners to buy back the business interest of the former business partner. Also, it is important to think about other situations where a buy/sell agreement may be useful, such as if a co-owner enters into other business which conflicts with the current business, disability of a co-owner, a co-owner that wants out of the business, or any other metric agreed upon in which the owners believe would hinder the business or its other ownership interests.
Another key component of a buy/sell agreement is financing the purchase required or allowed by the buy/sell agreement. In many situations, with either a cross-purchase or entity agreement, the individual owners or the business itself will not have the cash on hand to purchase the business interest. For the case of death of a business partner, many businesses, or the co-owners, (depending on whether the buy/sell agreement is a cross-purchase or entity agreement) will purchase life insurance policies on the owners of a business, having the beneficiary of the policy be the person(s) or entity that must purchase the business interest according to the buy/sell agreement.
A third key component of a buy/sell agreement is valuation of the business. It is important to valuate the business at least yearly in order for the person or business responsible for buying the interest may keep abreast of what amount of capital is necessary to effectuate the buy/sell agreement, and plan accordingly. The business should also be valued at the time of creation.
In summation, buy/sell agreements are an essential part of every business. Without an effective buy/sell agreement, other people or businesses may end up owning a part of, or even controlling, your business without your or any other owner's say. Contact your Texas attorney today for more information on buy/sell agreements.
Charlton M. Messer, Esq.
This article is for educational and informational purposes only. Contact your Texas attorney today for more information on buy/sell agreements in Texas.