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:

What happens if a company needs to, but can't afford to, buy out one of its owners?

Requiring an immediate 100% lump-sum cash payout can prevent even the most successful company from buying back an owner's interest. That's why having flexible payment terms built into a buy-sell or buyout agreement, signed in advance, can help. For instance, a buyout agreement can provide for a down payment of 1/4 to 1/3 of the buyout price followed by installment payments for three to five years at a reasonable rate of interest. For more on buyout agreements, see Nolo's Business Buyout Agreements.