Guide to Business Buy-Sell Agreements

Buy-Sell agreements are notoriously tricky. Here's what to do.

By Daniel Kehrer

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A buy-sell agreement, sometimes called a business buyout or partner buyout agreement, is a vital part of any small business that has more than one owner – including family businesses. But don't let the terminology confuse you. This is not about buying and selling businesses. It is an agreement between partners or co-owners governing these areas:

When and under what conditions a partner or co-owner can sell his or her interest in the business.
Who will be allowed to buy into the business.
Circumstances that would require a co-owner to sell.
What the price for that interest will be and how it will be determined.

Action Steps
The best contacts and resources to help you get it done

Get expert help to write your own buy-sell

Nolo, the king of legal self-help legal solutions for small business, has a terrific CD-ROM with all the forms and instructions you need to create a buy-sell agreement that will protect your business. Book/CD-ROM combo is called Business Buyout Agreements: A Step-by-Step Guide for Co-Owners.

I recommend: Details at Nolo.

Answer your most pressing buy-sell agreement questions now

How they are used? How they are funded? How does a business valuation play in? What about divorce, bankruptcy, or family issues?

I recommend: The Nolo FAQ on buy-sells has authoritative answers on these and other key questions.

Find a lawyer who can help

Buy-sell agreements often need to be carefully craft to fit the individual needs of a small business and its partners. Find a qualified attorney who can help your business draft a buy-sell agreement

I recommend: Locate a specialized business lawyer in your area at FindLaw.

Calculate the value of your business

A critical part of buy-sell agreements is placing a value on the business.

I recommend: Find business valuation experts at the American Society of Appraisers.

See examples of buy-sell agreements in action

A non-profit web site on entrepreneurship called eVenturing has a good collection of buy-sell agreement advice, including real-business examples of ho they work.

I recommend: At eVenturing.org, enter "buy-sell agreements" in the search tool.

Tips & Tactics
Helpful advice for making the most of this Guide

In a "cross-purchase" agreement, a departing owner sells directly to remaining owners. This works best for partnerships or corporations with no more than a half-dozen or so owners.
In "stock redemption" or "entity-purchase" agreements, the business itself buys back the departing owner's interest and retires the shares, making each remaining owner's interest more valuable.
"Hybrid" agreements combine elements of both.
Once you have an agreement in place, review it regularly. Pay special attention to the valuation formula. Have the business appraised every few years as a crosscheck.

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