A buy-sell agreement is, generally speaking, either part of or an addition to a shareholder agreement.

By way of background, many small, family-owned businesses have a shareholder agreement all parties who own stock in the family corporation, or an interest in an LLC, sign when coming into ownership. The shareholder agreement defines the rights and responsibilities of the individual shareholders with respect to each other. As such, it goes a long way in making sure that the business can run smoothly in the upcoming years.

Defining a buy-sell agreement

The buy-sell agreement restricts the ability of any shareholder just to sell or give their stock to anyone, including a stranger to the family who has no knowledge or experience with the business. This agreement is necessary because without it, a person is free to dispose of their stock as they choose, just as they would any other property. In other words, when family loyalty comes up short for whatever reason, the buy-sell agreement ensures that a family business will stay in the family.

Basically, a buy-sell agreement specifies that, if a shareholder dies or wants to dispose of their interest in the business, they either have to sell it back to the other shareholders, usually family members, or return the shares to the company.

Determining the price of the sale

The agreement also sets out guidance on how the business will determine the price of the sale when the buy-sell agreement gets triggered. This guidance ensures that, even though a family member cannot sell their shares on the open market, they will still get a fair price for the sale of their shares.

Preparing a buy-sell agreement is an important part of business succession planning. There is no one buy-sell agreement which works for all businesses, so a family business who is considering drafting or revising its agreement should careful evaluate its situation.