Many business owners eventually sell their ownership interest, bring in a new partner or step away from the business altogether. A buy-sell agreement helps those transitions move forward by establishing clear expectations before negotiations or unexpected events arise.
Here are the key provisions you should include when creating or updating one.
Details of ownership changes
Your buy-sell agreement should first explain why ownership may change. Common reasons include:
- Retirement
- Death
- Disability
- Divorce
- A voluntary sale
Specifying these situations in advance helps everyone understand when the agreement applies and what happens next. Instead of negotiating the process after an unexpected change, you can rely on the terms you already established.
How the business is valued
Your agreement should also explain how the ownership interest will be valued if a transfer takes place. Some businesses use a formula, while others rely on an independent appraisal to determine a fair price.
Whichever method you choose, it should reflect the current value of your business. Reviewing the valuation approach periodically can help prevent disagreements if ownership changes years after the agreement was first signed.
Purchase and payment terms
The agreement should also spell out who can purchase the ownership interest and how the parties will complete the transaction. For example, it may give the remaining owners, the business itself or another designated party the right to buy the departing owner’s share.
It should also explain whether the buyer will pay a lump sum, make installment payments or use another funding arrangement. Establishing these terms in advance can help reduce delays and uncertainty when it’s time to complete the transfer.
Keep your agreement ready for the future
A buy-sell agreement should grow alongside your business. If you add owners, expand operations or make other significant changes, reviewing the agreement with your attorney can help ensure it still reflects how your company operates today. That preparation can help you avoid unnecessary disputes and make future ownership transitions more manageable.