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What to include in a buy-sell agreement

The best defense against business disputes is having strong legal documents in place. One of these you need for your business is a buy-sell agreement, which outlines what happens to an owner's share in the event that something happens to the owner, whether that is leaving the company or leaving earth.

Before you draft the contract, it is important to know some of the terms to include in it to ensure it is thorough. Make sure you have the following provisions for a solid agreement.

All possible scenarios

Death and business departure (either from conflict or a desire to move on to something else) are only two reasons an owner may give up his or her share in the company. Others include the following:

  • Disability
  • Retirement
  • Divorce
  • Bankruptcy
  • Criminal activity

Each circumstance may require different details, so be sure to account for them all upfront. For example, in the event of an owner passing on, maybe a buyout is not necessary, and the share can go to a surviving spouse.

Purchase details

How much will the share cost? You may decide now, change it every year or agree on a formula to use when the time comes. Be sure to determine what you will do if you cannot agree on the price, such as relying on a business valuator or going through arbitration.

Know where the funds for a buyout will come from, such as an insurance policy, and what the tax implications of the sale will be. In addition, clarify if certain people are ineligible to be buyers.

How you structure the agreement also affects all these details. You have a few options:

  1. Cross purchase: shares going to other owners (usually for small businesses)
  2. Entity redemption: the business buying the shares
  3. Combination/wait and see: either of the above being a choice (usually for large businesses)
  4. One-way buyout: one party buying out another

Making these decisions now may be challenging, but it becomes even more so if you wait until the need for a buyout occurs.

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