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buy-sell agreements

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 Texas, buy-sell agreements are contracts among co-owners of a business that outline the conditions under which one owner can sell their interest in the company. These agreements are crucial for establishing a clear process for ownership transitions due to retirement, divorce, bankruptcy, disability, or death of a co-owner. They typically specify who is eligible to buy a departing owner's interest and how the sale price will be determined, either through a pre-agreed price or a formula for valuation. While the name might suggest otherwise, buy-sell agreements are not used when both owners intend to sell the entire business to an outside party. Instead, they function as buyout agreements, facilitating the transfer of ownership between existing partners. In Texas, as in other states, it is advisable for these agreements to be comprehensive and to address potential changes in ownership thoroughly. This may include obtaining the consent and signature of the co-owners' spouses, especially in cases where community property laws could affect the ownership interest in the event of a divorce.

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