Buy-Sell Agreement FAQ

Questions:

• When does a business need a buy-sell agreement?
• A buy-sell agreement is used for buying and selling businesses, right?
• If a co-owner of a business divorces, can the former spouse ask for part ownership in the business?
• Can a co-owner's personal bankruptcy affect the business?
• What's the best way to value a company when an owner is being bought out?
• What happens if a company needs to, but can't afford to, buy out one of its owners?
• Can a buy-sell agreement be used to avoid estate taxes?

Answer:

A buy-sell agreement is used for buying and selling businesses, right?

No. Despite the name, buy-sell agreements have little to do with buying and selling companies. Instead, they are binding contracts between co-owners that control when owners can sell their interest, who can buy an owner's interest, and what price will be paid. These agreements come into play when an owner retires, goes bankrupt, becomes disabled, gets divorced, or dies -- in other words, a buy-sell agreement is a sort of prenuptial agreement between business co-owners. Mainly these agreements guide buyouts between the owners themselves; that's why we like to call them buyout agreements.