The Importance of Buy-Sell Agreements

If your company has multiple owners, it is critical to have a well-drafted buy-sell agreement in place from the start. If something happens that creates a market for one owner’s business interests, a buy-sell agreement can protect the remaining owners from unwanted parties gaining an interest in the company. These contracts also set out terms for the preferred transfer of ownership to allow for a smoother transition in many situations.

When is a Buy-Sell Agreement Applicable?

Many events can occur that make a business owner’s interests vulnerable to other non-owner parties. Some such events include:

  • Divorce – A former spouse may be entitled to certain interests as assets of the marriage under North Dakota law
  • Bankruptcy – In some cases, an owner’s personal bankruptcy can result in the seizure of their business interests
  • Death – If an owner passes away, the business interests could pass on to family members who are not otherwise involved in the company.

In addition, if an owner becomes disabled and unable to participate or chooses to retire, a buy-sell agreement helps ensure the other owners have control over what happens to the departing owner’s stake. 

Buy-sell agreements typically mandate that the remaining owners have the opportunity to purchase the departing owner’s interests before any other party. This ensures that an ex-spouse or relative who knows nothing about the business will not suddenly have a substantial stake. The contract can list particular events that trigger a mandatory or optional buyout, as well as determine how the purchase price will be calculated and what funds should be used for the purchase. You should always have an experienced business attorney draft your buy-sell agreement to ensure it includes all relevant and necessary provisions.

Benefits of Buy-Sell Provisions

Ownership transfers or changes can be tumultuous for a business. If an owner’s interests come up for sale for any reason, a buy-sell agreement can help ensure the following:

  • Continuity and predictability – When key parties depart a business, a buy-sell agreement can minimize the chances of unknown owners stepping in and disrupting operations. Eliminating uncertainty can help preserve relationships with employees, customers, and creditors even in a time of change.
  • Market creation – When ownership interests of a privately-held business become available, there may not immediately be a practical resale market. A buy-sell agreement provides methods for remaining owners or the company to purchase the interests, automatically creating a market.
  • Price and payment determination – There are many ways to value business interests, and owners do not want disputes to arise regarding valuation methods. The buy-sell agreement will specify how to value the interests, as well as how the business will purchase them, such as with life insurance proceeds. 

Consult with Our Fargo Business Law Firm Today
A buy-sell agreement allows business owners to retain control over the company, as well as eliminate conflict and uncertainty when an owner must bow out. If you would like to discuss a buy-sell agreement or any other type of legal matter regarding your company, please feel free to email business attorney Stephen Welle at O’Keeffe O’Brien Lyson Foss. You can also call 701-235-8000 or 877-235-8002 (toll-free) to schedule an appointment.

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