Buy-sell agreement

A buy-sell agreement decides in advance what happens to an owner’s stake when something changes. The usual triggering events are death, disability, retirement, leaving the company, divorce or a wish to sell. For each one, the agreement says who has the right or the obligation to buy the shares, how the price is set, and how the purchase is paid for.

In general terms there are two common shapes. In one, the remaining owners buy the shares themselves. In the other, the company buys them back. Some agreements combine both. The price may be a fixed figure reviewed each year, a formula, or a business valuation carried out when the event happens. Funding often comes from savings, borrowing or key-person insurance.

In a family company, a buy-sell agreement is often what keeps shares inside the family, or inside the part of the family that works in the business. It can stop shares passing to an in-law after a divorce, or give a sibling who wants out a fair and orderly exit. Without one, those questions tend to be settled under pressure, at the worst possible time.

Buy-sell agreement or shareholder agreement?

The two are often confused. A shareholder agreement is the broader document: how owners vote, appoint directors, share information and resolve disputes. A buy-sell agreement deals only with transfers of ownership. Sometimes the buy-sell terms sit inside the shareholder agreement as one section.

Why it matters for the successor

A buy-sell agreement settles who owns the shares. It does not settle who leads. A successor can hold a clear ownership position and still not have the authority of the room, which is a separate piece of preparation. The siblings and the successor article covers how ownership and leadership questions tangle between brothers and sisters.

This is a general definition only. The family should involve its lawyer, accountant and financial advisor in drafting, funding and reviewing any buy-sell agreement.