What Are Buyout, or Buy-Sell, Agreements?

Contrary to popular belief, buy-sell agreements don't have anything to do with buying and selling companies. Instead, they control when and how shares in a corporation can be bought and sold. Buy-sell agreements are also sometimes called shareholders' agreements or stock agreements. Because of this confusion over terminology, we will stick to the term buyout agreement from now on.

Typically, a buyout agreement controls the following decisions:

• whether a departing shareholder must be bought out
• who can buy a departing shareholder's stock (this may include outsiders or be limited to other shareholders)
• what price will be paid for a shareholder's interest in the corporation, and
• what other events will trigger a buyout.

It may help to think of a buyout agreement as a sort of "premarital agreement" between co-owners: It determines what will happen if your corporation's owners decide not to stay together 'til death do they part.

What Events Should Be Covered in a Buyout Agreement?

Typically, the events that trigger the buyout of a shareholder's interest are:

• the retirement or resignation of a shareholder
• an attractive offer from an outsider to purchase a shareholder's interest in the corporation
• a divorce settlement in which a shareholder's ex-spouse stands to receive all or part of a shareholder's stock of the corporation
• the foreclosure of a debt secured by a shareholder's stock
• the personal bankruptcy of a shareholder, or
• the disability, death, or incapacity of a shareholder.