Importance of a Buy-Sell Agreement in Business Partnerships

1 September 2017
 Categories: , Blog


Various business agreements come in handy when creating, running and terminating a business partnership. Of these, in a business partnership involving several owners with specific obligations, unfortunate events may occur like the death of one of the business owners, divorce or bankruptcy. As a result, this shareholder may end connections with the company. Planning for such eventualities well in advance is important, or else the remaining business owners may face serious business challenges. Previous agreements might need to be revised and modified to factor in the change. With the existence of a buy-sell agreement, however, such stressful situations can be prevented.

What is a buy-sell agreement?

This is a type of agreement signed by business partners or owners ascertaining which party can buy the shares or interest of the departing shareholder with a fair and realistic price for the shares or interest. It is best that the shares of the departing owner be bought by the remaining owners to avoid complications brought about by a new majority shareholder in the business.

Moreover, a buy-sell contract also prohibits the departing owner from selling his or her shares at exorbitant amounts. A realistic market value is applied on what is sold to the remaining business owners.  This stops any shares being stockpiled for a higher fee by a shareholder leaving the company.

Furthermore, this contract may spell out the procedures that prevent disagreements through a decision to sell the business via a majority vote or consensus in special circumstances. This type of contract covers any sort of eventualities that can occur in a business partnership.

Reduction of burdens

The existence of the buy-sell contract also helps to reduce certain burdens. Price assessment in estate tax and interest sales or stock can affect the business. A buy-sell agreement can be employed as proof in evaluating the value of the company. Without this agreement, the government is allowed to ascertain the value of the corporation for tax purposes on its own. When a shareholder needs to trade a number of his or her shares for cash, the buy-sell contract affords the other shareholding partners the first opportunity to buy before anyone else. This safeguards them from potential ownership changes.

To lower the weight of uncertainty in business partnerships, business owners should talk to an attorney who specialises in commercial law to draft a buy-sell agreement with explicit clauses for the partners in order to cater for various eventualities in the future.