The basics of buy-sell agreements

No business partnership lasts forever. Partners pass away, retire or simply move on to new challenges.

As with every hurdle your business might face, preparation is key. A buy-sell agreement is how partners in a closely-held business prepare for one or more members of the ownership group giving up their shares. Using a buy-sell agreement maximizes stability and predictability during the transition.

In Texas, there are two main types of buy-sell agreements: cross-purchase agreements and redemption agreements. In a cross-purchase agreement, a partner agrees to sell their share in the business to one or more of the remaining partners upon their departure. In a redemption agreement, the business entity purchases the departing partner’s shares.

When the agreement kicks in

A buy-sell agreement needs to include what are called “trigger events.” These are incidents that automatically trigger the purchase plan, or at least might do so. Common trigger events include:

  • A partner’s death
  • A partner’s divorce
  • A partner’s retirement
  • A partner’s disability
  • Termination of the owner’s employment by other means
  • Right of first refusal

The right of first refusal trigger refers to a situation where a third party has offered to buy a partner’s share of the business. If your buy-sell agreement contains a right of first refusal as a trigger, it means the other partners have the right to purchase the share at the same price and terms as the third party’s offer. Note that this is usually written as a right, not an obligation, on the part of the partners.

For family businesses — and non-family companies too

Buy-sell agreements are especially popular with family-owned businesses. Things like divorce and untimely death can result in non-relatives gaining partial control of the company unless steps are taken to control how succession will occur. But even if your business is not family-owned, a buy-sell agreement can be beneficial for you and your partners.