How to Use a Buy-Out Agreement to Protect Your Business From the Death, Disability, Retirement, or Voluntary Exit of a Business Partner

by Jennifer A. Grady, Esq.

Failing to create Imagea formal transition plan in the event of the death, disability, retirement, or divorce of the business owner, or the transfer or sale of the business, is a drastic mistake that is frequently made by the owners of closely-held corporations.  This lack of planning can be fatal to a business that does not have a formula for valuing tangible property, such as vehicles, real estate, and equipment; and intangible property, such as licenses, trade names, patents, trademarks, client lists, and goodwill.

A buy-out agreement, also known as a buy-sell agreement, is a legally binding contract between co-owners of a business that governs the situation if and when a co-owner dies or leaves the business.  Every co-owned business needs this agreement the moment the business is formed, or as soon as possible after the formation. A buy-out agreement not only protects the remaining business owners when a co-owner intends to leave the company, but also provides protection for the owner who leaves the business.  A buyout agreement acts as a sort of “premarital agreement” to protect each owner’s interests by setting the price and terms for a buyout.  It is sometimes referred to as a “business will.” Continue reading