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Understanding buy-sell agreements

On Behalf of | Jun 7, 2022 | Business Law |

Many Texas entrepreneurs can be extremely enthusiastic when they start their business, especially if they are joined in the enterprise by one or two close friends. Business relationships, like marriages, can often fray over time, and the initial enthusiasm turns to anger and hostility. Dissolving a business relationship can be just as difficult as dissolving a marriage, but the state of Texas does not give business owners the same clear-cut rights that it gives to marital partners. One of the best tactics for avoiding a difficult fight between business owners is the use of a well-drafted buy-sell agreement.

Different types of buy-sell agreements

Choosing the right type of buy-sell agreement depends upon a number of factors: the nature of the business (is it a manufacturing concern or a retail sales business?), the number of partners (or shareholders), the relative contribution of each shareholder or partner, and the nature of the business dissolution that is agreeable to a majority of the owners. The basic decision is usually whether the shares of the departing (or disabled) owner will be passed to the entity or the remaining owners.

Triggering event

Most buy-sell agreements define a triggering event, that is, the event that causes the provisions of the buy-sell to become effective. The most common types of triggering events are the death of an owner or total disability, such as a stroke. Not all triggering events are medical; the attempt to sell shares to a third party can trigger a buy-sell’s provisions.

Common buy-sell agreements

In an entity purchase agreement, the business will pay a predetermined price to the departing owner, and those shares will become the property of the business. If the entity is a corporation with shareholders, the agreement is considered to be a stock redemption agreement. If the business is a partnership, the terms of the buy-sell may be considered a dissolution. Another common form of buy-sell agreement is known as a cross-purchase agreement. The interest of the departing owner is purchased from his estate (in the case of death) or from the assignees of the departing owner.

Regardless of the type of buy-sell agreement chosen by the owners, the agreement should be drafted or at least reviewed before execution by a knowledgeable corporate attorney.