Using a buy-sell agreement to sell a small business

Using a buy-sell agreement to sell a small business

| Jun 10, 2020 | Business Law, Sales & Dissolutions |

Owners of small businesses in Baton Rouge may wish to sell their business or a portion of it for many different reasons. Perhaps the most common reason is retirement: the owner of the business has spent several decades building the enterprise and wants to retire. Another common reason is a favorable offer from a person or entity who sees significant opportunity for growth in the business. Other reasons include unexpected events such as a serious illness or injury, physical damage to the business, shrinkage of the market, or a change in the market’s taste for the company’s products (think hula hoops, for example). Whatever the reason, any owner considering a sale of the business should consult an attorney about using a buy-sell agreement to set the terms of the transaction and to ensure payment.

In its simplest terms, a buy-sell agreement is a contract between the seller and the buyer that sets out the essential terms of the transaction:

  • Sale price and terms of payment
  • Date of closing
  • Security for payment if buyer is not an individual
  • Post-closing payments to owner for services as a consultant
  • Items included in the transaction
  • Any warranties provided by the seller regarding the assets of the business
  • Disclosure of critical information such as debts owed by the company and obligations owed to the company
  • Tax status

A buy-sell agreement may contain a variety of other terms depending upon the nature of the company’s business, cash flow, potential relocation of the company’s place of business.

An important consideration is the identity of the buyer. If the buyer is not an individual (the most common case), the payment of the sale price should be personally guaranteed by one or more individuals. The creditworthiness of the buyer is an essential term, and the buyer’s ability to pay the full price when due should be reviewed by an attorney.

Buy-sell agreements come in many shapes and sizes. Each agreement should be tailored to suit the nature of the business and the wishes of the parties. A competent business attorney should be consulted about the terms of the agreement and the reduction of any oral agreement to writing.