A buy-sell agreement may also be referred to as a buyout agreement. Under this arrangement, co-owners of a business set the conditions and provisions on actions to be taken in the event that one of them leaves the business or dies.
Entering into a buy-sell agreement is an important step in starting a business with another entity. This helps protect both parties should there be disagreements or unforeseen circumstances which affect the ownership of the business.
There are different kinds of buyout agreements. Under a partner buyout, specifications on which the departing partner can sell his shares to are set. The price is also agreed on. Under this kind of agreement, the departing partner will be sure to get a fair amount for the sale. Also, the remaining owners are sure that their new partner will be someone they consider to be qualified.
On the other hand, a business buyout agreement involves setting a price or pricing formula for the value of a business. The parties involved can either set a fixed price, state that the price will be equivalent to the book value, or determine other schemes by which the value will be determined.
Initially, a buy-sell agreement may not seem necessary. If the parties starting the business are optimistic and the conditions seem favorable, they may feel that setting such provisions suggests that the business is set up for failure. However, setting up a buy-sell agreement is advisable no matter what the business climate is, in order to avoid bigger problems and disputes in the future.