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The essential elements of a buy-sell agreement in Texas

Small business owners in Texas must plan for many contingencies to protect their company and its assets. One of the most disruptive events in the life of a closely held business is the decision of one or more co-owners to leave the company. Such a decision can cause major strife between the owners over the price to be paid to the departing shareholder, the mechanics of setting a price for that person’s interest, and the mechanics of actually paying the price.

One of the best ways to handle such an event is to prepare a buy-sell agreement that will be signed at the time of the formation of the business or whenever a new owner either leaves or enters the business. Understanding the elements of a successful buy-sell agreement can provide a strong foundation for the long-term success of the business.

The elements of the buy-sell agreement

Several elements of a buy-sell agreement must be addressed:

  • The first element is the list of events that will allow an owner to leave the business. Such events can include the death of a partner, the voluntary wish of an owner to sell his shares to the other owners, the retirement of an owner, or other events that may be agreed to by all parties.
  • The second element is determining the price of the shares of the departing owner. In some businesses, the price can easily be determined by calculating the net value of the company’s assets. In other businesses, a complex calculation of future value of the company’s income stream may be required. An important part of this element is determining the manner in which the departing owner will be paid for his shares. Will payment be made entirely in cash? Will the payment be made in a lump sum or will installment payments be allowed?
  • An important third element is deciding whether an owner can be forced by other owners to sell his interest. In most cases, a mandatory sale clause can permit owners to resolve irreconcilable disputes by compelling one owner to sell his interest to the other shareholders. If the owners want a mandatory sale provision, the agreement must provide a complete and accurate description of the procedures necessary to begin and complete the buy-out process. Most buy-sell agreements contain mirror image provisions for a compelled sale: if a shareholder can be forced to sell his shares, a single shareholder is usually allowed to compel the other shareholders to purchase his interest.

Raising the issue of a buy-sell agreement

Anyone who is thinking of forming a small business may wish to raise the issue of a buy-sell agreement with the other shareholders. This brief summary does not begin to mention all of the issues that may arise when two or more prospective shareholders begin to negotiate their business arrangement. For that reason, a consultation with an experienced business lawyer may help to enumerate the issues that must be resolved and to explore methods resolving any disputes.