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:

Can a co-owner's personal bankruptcy affect the business?

In the worst case scenario, a bankruptcy trustee could liquidate the business (sell all of its assets) and take half to pay the bankrupt owner's debts. To prevent a business from getting tied up in bankruptcy court, the owners can sign a buy-sell or buyout agreement that requires a co-owner who faces bankruptcy to notify other co-owners before filing. Under the terms of this agreement, this becomes an automatic offer to sell the bankrupt owner's interest back to the other owners. The buyout money goes to the bankruptcy trustee and the business can proceed without difficulties.