A buy-sell agreement, also known as a business continuity agreement or a buyout agreement, is a contract between firm co-owners that specifies how to manage the departure of a member. A buyout agreement is an essential aspect of LLC ownership since it governs who may purchase a member’s stake and specifies a set price for ownership interests.
What Is the Purpose of a Buyout Agreement?
The majority of LLCs should draught a buyout agreement. One of the rare exceptions is a company that has:
Owners might be single, married, or parent/child.
What Is the Purpose of a Buyout Agreement?
A member will most likely exit a firm at some time. In the absence of a buyout agreement, state law may require the dissolution of an LLC when one of its members quits. A buyout agreement may create predefined standards for dealing with changes in ownership and can prevent unwelcome purchasers from acquiring a stake in the firm. A buyout agreement has the ability to control:
The transfer of ownership; if the remaining members will buy out the departing member;
How to value an ownership stake; and/or Payment conditions for a withdrawing member’s interest
Buyout agreements are often included in the operating agreement of the LLC, but they may also be recorded in a separate document.
What Happens When a Buyout Agreement Is Signed?
A buyout agreement specifies the situations that will trigger a buyout of a member’s stake. Typical occurrences include:
Bankruptcy (which results in the automatic sale of the member’s equity to the corporation)
Death\sRetirement
A divorce settlement that offers an ex-spouse a stake in the business (the ex-spouse must sell any acquired interest back to the company)
Incapacity or disability
License revocation
Personal loan default
Optional buyouts and forced sales
When ownership interests shift, a buyout agreement might contain clauses that not only offer the LLC the opportunity to acquire the leaving member’s stake, but also oblige the LLC to buy the departing member’s interest.
Option to Purchase an Owner’s Stake: This option offers the LLC and its members the opportunity to acquire back an ownership interest from a member, a member’s family, or the member’s estate for a specified price and within a particular time frame. This option, for example, may be used to purchase an interest from a dead member’s estate, a member who retires or leaves, or a member who becomes incapacitated.
Right to Forcible Sale: This clause allows a member who wishes to resign or retire to compel the firm to purchase their investment. If a leaving member or a member’s family makes a request, the LLC or its members must acquire the interest within a particular time frame and at a defined price.
Obtain Legal Assistance in Changing the Ownership of Your LLC
If you’re trying to decide if a buyout agreement is suitable for your LLC, you should get competent legal guidance. Contact a local company attorney who can guide you through the different alternatives if a member wishes to leave the LLC and, if required, assist in the drafting of the buyout agreement.