This agreement is one of the primary ways closely held businesses control who owns equity in the entity. Often incorporated into the Operating Agreement for a Limited Liability Company, the Buy-Sell Agreement is the agreement between the owners of an entity on how each member’s ownership rights may be bought and sold. Often this agreement will include events where an owner may voluntarily sell his equity (e.g., when someone approaches the equity owner or they seek to be bought out of the company) and events where an owner’s equity in a company may be bought based on involuntary actions of the equity holder (e.g., bankruptcy, senility, and other events where an owner’s actions or personal circumstances could create liability for the company).
This agreement should be updated on a regular basis because one of the primary components of the Buy-Sell Agreement includes a method of valuation (or an actual valuation) of the company. This valuation gives other owners of the company a priority on price for the purchase of another owner’s shares.
Buy-Sell Agreements are often funded with Life Insurance or Disability Insurance. Insurance is an inexpensive way to make sure there is enough money to pay for an owner’s shares if one of the events in the agreement happens.