A buy-sell agreement is a contract between the owners of a business that sets forth certain triggering events that will allow the owners to exit from the business, who will be permitted or required to buy their shares, how the shares will be valued for purchase, and how any such purchase will be funded. Business owners will generally work with an attorney to navigate each of these issues in light of their specific circumstances. One-size-fits-all buy-sell agreements are inadvisable, because the facts surrounding each business and the needs of its owners are different in every situation.

A buy-sell agreement allows business owners to plan in advance for how an owner and the business will part ways upon the occurrence of certain triggering events such as the death or disability of an owner, the voluntary decision to terminate ownership either through a routine sale of stock or through retirement, or the company’s decision to part ways with the owner with or without cause.

If the company or the remaining shareholders are going to be required to purchase an exiting owner’s stock, or even if they will simply have the right of first refusal, it is important that the agreement provide for where the money for the purchase will come from. Failure to do so puts the company in a position where it has to raise a large amount of capital on short notice in order to meet its obligation. This situation also does not give the exiting owner any certainty that the company will be able to meet its obligation to purchase his or her stock.