What is Buy-Sell Agreement Drafting?
A buy-sell agreement is a legal contract signed by business partners. It specifies what will happen if a partner leaves the company, such as if they die, retire, or leave the company, clarifying how their ownership portion will be purchased or transferred by the remaining partners.
These contracts are important to have in writing because they enable smoother transitions, while preventing third parties from securing ownership in the business.
If you need to draft a buy-sell agreement, you’ll want to ensure you include specific terms to protect you. Read the rest of this article to learn how to draft a buy-sell agreement and why you should hire a professional lawyer to help you.
What are the Types of Buy-Sell Agreements?
There are two main types of buy-sell agreements, although a contract can contain a blend of both of them.
- Cross-purchase agreement. In this agreement, the owners or partners buy the share of the business left by the partner who is leaving.
- Entity-purchase agreement. By comparison, this is when the business purchases the leaving partner’s share.
In some cases, partners might choose a wait-and-see approach. This gives them a chance to decide if they should make use of a cross-purchase or entity-purchase agreement, or a blend of both.
What Must Be Included in a Buy-Sell Agreement?
To ensure a buy-sell agreement is clear and comprehensive, it should include these key terms and clauses.
- List of partners. All partners in the business must be listed with their equity stakes.
- Business valuation. This will have to be a recent valuation to place an accurate value on the partners’ interests.
- Trigger events. These are the events that will cause the buyout to occur, such as if a partner dies or retires.
- Purchase details. This section of the contract outlines exactly what partners will acquire after the trigger event.
- Funds. It’s common for partners to buy life insurance policies on each other so that after the triggering event, the policy’s proceeds are used to pay the leaving party’s business interest.
- Payment terms. This section of the agreement clarifies how the payments will be made, such as in a lump sum.
- Transfer restrictions. There might be rules in place that prevent owners from being allowed to sell their shares to third parties.
- Dispute resolution. By having a clear dispute-resolution method, such as arbitration, the agreement can help partners to settle future disputes quickly.
What are Tips for Drafting a Buy-Sell Agreement?
Now that we’ve outlined key terms commonly included in a buy-sell agreement, there are some important tips to consider when drafting one. These include the following:
Consider Various Trigger Events
Your buy-sell agreement should include different potential scenarios for partner buyouts. This includes mandatory or optional buyouts like death or retirement, and clear payment terms once they occur, such as down payments and interest rates.
Implement Partner Protections
You want the contract to protect both minority and majority partners. Include tag-along rights that protect minority partners by enabling them to use the same terms when selling shares as the majority owners.
There are also drag-along rights, which let majority owners use a business sale without any obstructions.
Update the Business Valuation
When including a business valuation, it’s a mistake to use a fixed price as this lacks flexibility. Since the business value fluctuates, partners might not benefit from a fixed price that isn’t accurate or fair.
Choose a Realistic Deadline
It’s common for buy-sell agreements to state that a buyout request must be made within 60-90 days of a trigger event. This isn’t always realistic or reasonable, such as if you want to secure financing, so you might want to consider a longer deadline.
Consider a Non-Compete Clause
It’s wise to prevent shareholders from aligning with your competitors or being allowed to set up a business that competes with yours in your location. These can be damaging to your business, which is why you should include a non-compete clause in your buy-sell agreement.
How Can a Lawyer Help You to Draft a Buy-Sell Agreement?
Buy-sell agreements can be complex or challenging to navigate, especially if you’re drafting them for the first time. Working with a lawyer can help you in various ways. A lawyer will:
- Tailor the buy-sell agreement to suit your company’s ownership and goals.
- Check that the agreement is aligned with all tax and corporate laws.
- Define what events will trigger the buyout for clarity.
- Ensure there are no vague or ambiguous terms that are confusing or create uncertainty.
- Establish a contract that’s legally enforceable.
- Keep all terms fair and balanced to prevent disputes.
- Structure the agreement so that tax consequences are minimized.
- Specify all funding arrangements, such as life insurance, to prevent obstacles during the funding phase.
- Check for any hidden risks you might not have spotted.
- Guide you through the process of drafting buy-sell agreements.
- Review your agreement periodically to ensure that it’s updated to remain accurate.
Where to Get a Legal Drafting of Your Buy-Sell Agreement
If you need to find a lawyer to draft your buy-sell agreement, you should consider hiring a qualified lawyer from an online legal platform. This makes it easier to find the right lawyer than cold-calling traditional law firms.
On ContractsCounsel, one of the largest online legal marketplace where clients connect with vetted lawyers, you can hire a professional lawyer to draft your buy-sell agreement so that it’s clear, balanced, and legally valid.
Here’s how to request it on the platform.
1. Go to the ContractsCounsel marketplace.
2. Post your project for free.
3. Receive multiple bids from lawyers directly on the platform who can assist you.
4. Once you receive the lawyer bids, review the lawyers' profiles. There’s lots of info on the platform to help you choose the best lawyer, such as their location, client ratings, years of experience, and field of expertise.
5. Connect with a lawyer you think is best suited to your requirements and hire them.
