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Five things to include in a buy-sell agreement

On Behalf of | Mar 31, 2023 | Business & Commercial Law |

Even if a business is successful, it may be time to let it go if it is no longer part of one’s priorities. If you are a partner who wants to sell their business shares, it is important to draft a buy-sell agreement that would benefit and protect all parties. Some terms depend on each business, but there are terms that parties must include in the document.

Must-have inclusions

While the terms of a buy-sell agreement depend on the unique facts and circumstances of each case, there are mandatory inclusions, such as:

  • The reason for the buyout: The document should include the triggering event for the buy and sell. Some grounds could be death, disability, bankruptcy, retirement or simply opting out of the business.
  • A list of involved owners or partners and their current shares: Like any other agreement, the names of the people involved should be included in the document. Moreover, it is important to establish the fair value of ownership shares to ensure that each owner’s shares are protected during the buyout.
  • An updated valuation of the business: To put a reasonable price on the shares, it is essential to know the current market value of the business.
  • Funding instruments: It is crucial to have a sufficient source to finance the buyout to protect the seller’s rights. Funding could be through cash, insurance sinking fund or debt.
  • Tax and estate planning considerations: The document should also state if the business forms part of the estate planning arrangements of any of the owners and how potential taxes can affect the owners and their successors.

These terms are a top few that pop up when one thinks of necessary terms to include in a buy-sell agreement.

One step forward

Selling one’s business shares requires a lot of time and effort, which can be stressful. However, understanding the importance of a buy-sell agreement and the necessary inclusions is already one step toward reaching one’s goal.