Buy-sell agreements are agreements/contracts between co-owners of a business, and provide the circumstances in which one of the owners can sell their interest; who can buy a co-owner’s interest; and how the sale price will be determined. Despite the somewhat confusing name, these buy-sell agreements are not relevant when both owners wish to sell the business to a third party (person or entity other than the two owners).

Because buy-sell agreements are only relevant when one of the co-owners’ interest is being sold, these agreements generally apply when a co-owner retires, gets divorced, goes bankrupt, becomes disabled, or dies. Buy-sell agreements usually provide for the remaining co-owner to buy the exiting co-owner’s interest in the business at an agreed-upon price, or to calculate the purchase price using an agreed-upon method of valuation (for valuing the company). It may be easier to think of these agreements as buyout agreements, as one owner is typically buying-out the other owner. Buy-sell agreements should carefully address these situations in which an owner is likely to exit the business, or in which the ownership of the business might otherwise change—for example, upon the divorce of an owner—and include the agreement and signature of the co-owners’ spouses if necessary.

In California, buy-sell agreements are legally recognized contracts that outline the conditions under which one co-owner of a business can sell their interest, who is eligible to purchase it, and how the sale price is determined. These agreements are particularly relevant in situations where a co-owner retires, divorces, declares bankruptcy, becomes disabled, or passes away. The purpose of a buy-sell agreement is to ensure a smooth transition of ownership without disrupting the business's operations. It typically includes provisions for the remaining co-owner(s) to purchase the departing owner's interest at a pre-determined price or according to a specified valuation method. California law does not prescribe a specific format for these agreements, but they must adhere to general contract principles and may be subject to other relevant laws, such as community property laws in the case of divorce. It is advisable for the agreement to be comprehensive and to include the consent and signature of any spouses, to prevent future disputes over ownership interests. Consulting with an attorney to draft or review a buy-sell agreement is recommended to ensure that it meets all legal requirements and adequately protects the interests of all parties involved.