Important Inclusions in Business Partnership Buy-Sell Agreements

Buy-sell agreements are essential elements when two or more parties form a legal partnership. The contract established when people intend to start and operate a business together is strongest when it includes clear instructions for what occurs at the end of that working relationship.

In scenarios where partners might later sell their interest to one another, or possibly to an outside party, creating a buy-sell agreement within the business partnership document can reduce opportunities for conflict later. The buy-sell agreement itself generally needs to contain specific provisions that set forth everyone’s rights and responsibilities to promote a smooth transition if a partner chooses to invoke the agreement.

Several items are generally included within sound buy-sell agreements, such as:

• Specific triggering events — A buy-sell agreement is a binding contract. The partners are subject to an obligation to uphold the agreement if the other partner chooses to invoke it. Therefore, limiting the scenarios in which either partner can compel the sale of the company or a buyout is an invaluable form of protection. The death of either partner, a divorce, a medical emergency, retirement and claims of partner misconduct are all common triggering events.
• Accepted valuation method — There are multiple ways to calculate the fair market value of a business. Depending on the function of the company and other details about the partnership, there may be one valuation method that is more appropriate than other options. Agreeing in advance on the valuation method can prevent a procedural dispute down the road.  
• Preferred purchasers — In some cases, a buy-sell agreement only allows for cross-purchase, meaning that only the remaining owners can acquire the interest of the party exiting the organization. Other times, an agreement may allow for the business entity itself to acquire the shares owned by the departing individual. A hybrid solution is also possible. Clarifying who can buy a partner’s interest is key to long-term organizational viability.
• Payment terms — Disputes about how the departing partner receives compensation for their interest in the company could derail negotiations. Agreeing in advance on a structured system of payment or on an upfront, lump-sum payment arrangement can prevent disputes when one partner invokes the buy-sell agreement.
• Dispute resolution framework — Even with many of the terms already clarified, partners may find themselves disagreeing intensely over how to manage the sale process. Having an agreement in place that requires alternative dispute resolution can help keep the transaction on track rather than headed to court. It can also enhance organizational privacy and prevent losses caused by protracted litigation.

Strong partnership agreements should have a buy-sell agreement that contain these provisions and other language tailored to the specific situation. 

The Law Offices of Donald W. Hudspeth, P.C. provides counsel to Arizona clients on buy-sell agreements and other business formation issues. For a consultation, please call 866-696-2033 or contact us online. Our office is in Phoenix.