Why Business Owners Need a Buy-Sell Agreement

I just gave an overview of business entities to a group of new lawyers. One of the recurring points was that no matter whether their business was a partnership, LLC or corporation, businesses with multiple owners needed a buy-sell agreement among the owners.

The buy-sell agreement minimizes risks from owner disputes. One of the most difficult situations for small business owners is the “business divorce,” where the owners no longer want to be in business together.  It can also be difficult when an owner can no longer work in the business through death, disability or incapacity.

Without a written buy-sell agreement (whether it is called Shareholder Agreement, an Operating Agreement, a Partnership Agreement or a Buy-Sell Agreement), it can be very difficult to force out an owner or to get paid for your part of the business when you want/need to leave.

The main remedy is to ask for a court to dissolve the company, pay off the creditors, and split the proceeds based on percentage of ownership. In some cases, a minority owner may have grounds for a lawsuit for “minority oppression," but this can be costly and time-consuming.  

The better option is to draft an agreement up front that lists events that could or must trigger a purchase of one owner’s interest. These events often include death, disability, divorce, bankruptcy or incompetency.  Death and disability should be funded with insurance, so there is money to pay the owner or their estate. 

In addition, a good agreement should have a provision for one owner to buy out another (or groups of owners) if there is a deadlock in management or an owner wants to leave the business for personal reasons.