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What are the Key Elements of a Buy-Sell Agreement?

Your business is likely your most important asset and one that you want to protect. It is important to ensure that all parts of your company are protected in the event that one of the partners or stakeholders decides to leave the business. Buy-sell agreements are necessary for all types of businesses, particularly small companies.

A variety of events may trigger the implementation of a buy-sell agreement including such things as retirement, employee resignation or termination, divorce, bankruptcy, or the disability or death of a critical party. An experienced attorney will assist you in putting a buy-sell agreement in place.

Types of Buy-Sell Agreements

There are several main types of buy-sell agreements, including:

  • Cross-purchase agreements: Cross-purchase agreements allow shareholders to buy stocks of a partner and are often utilized in planning a replacement.
  • Redemption agreements: Redemption agreements allow the company to purchase the stakes from a partner who has died or has become disabled.
  • Company and asset purchase agreements: Company and asset purchase agreements provide for the transfer of ownership.
  • Hybrid agreements: Hybrid agreements often allow for a delay in the decision of stock redemption, for example, and are more flexible than other types of agreements.

Key Elements of a Buy-Sell Agreement

Regardless of the type of buy-sell agreement you require, there are some key elements that are essential to the contract. These elements will define the details and clarify the terms, triggering events, and payout options that are part of the contract.

  • Identifying the parties
  • Defining buyout triggers
  • Structure of the agreement
  • How to value the company
  • Resources for funding
  • Taxation considerations

It is critical that you make sure you consider all of the key elements when creating a buy-sell agreement that protects your business, shareholders, employees, and customers. Buy-sell agreements must provide safeguarding or they are not useful. At the same time, they must adequately take triggering events into consideration so everyone understands when the agreement is utilized.

Do We Need a Buy-Sell Agreement?

A buy-sell agreement is essential for every business, large or small. Without an agreement in place, owners and stakeholders are left without adequate direction in the event that an important party dies or becomes disabled. Like a life insurance policy is necessary for individuals, the buy-sell agreement is necessary to guide the business when something changes. At some point, there will be an event that will require parties to make critical decisions. Without a buy-sell agreement, the resolution could be undesirable or even harmful to the company.

A buy-sell agreement is a contract that provides everyone involved with some assurance and peace of mind. The parties decide how to handle the major issues that could arise in the future. The best way to make sure that your company will withstand the departure of a key party is to implement a buy-sell agreement that is created specifically for your business. To learn more about buy-sell agreements, contact our knowledgeable attorneys at Moen Sheehan Meyer, Ltd. at (608)784-8310 or online.

Published March 7, 2022
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