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BUY-SELL AGREEMENTS
A buy-sell agreement is a binding contract among owners of a business that specifies who will buy a departing owner's equity share as well as specify the price per share. You could see it as a kind of corporate prenuptial agreement.
For example, let's take one common scenario: A company is co-owned by two partners, one of whom suddenly dies, leaving his share to his spouse. The other partner and the dead owner's wife have never gotten along, and both know it wouldn't fly to try to run the business together. So one has to buy the other out. That's where having a buy-sell agreement makes all the difference.
There are different approaches to structuring a buy-sell agreement:
Cross-purchase agreement. This is a contract between the owners.
Stock redemption agreement. This is a contract between the company and the owners.
Third-party buyout. This is a contract between the owners and key outside people.
In order to avoid disputes and litigation, it is crucial that the buy-sell agreement has a method for determining the price of the shares. This is a notoriously difficult exercise, and the best approach usually is to hire an independent financial appraiser.
