Most business partnerships start with the best intentions, but not every partnership ends that way.
That’s why buy-sell agreements are so important. A buy-sell agreement is a contract between
business partners that dictates who can buy a departing partner’s share of the business and
establishes a fair price for the partner’s stake. The agreement also describes how to determine a
company’s value if all the owners decide to sell.
A typical buy-sell agreement covers a potential sale or buyback situation when a partner leaves a
business. The agreement may specify to whom a departing partner can sell (usually they must sell
to someone else in the business), and it also sets a fair price for their share of the business. This
protects the remaining partners by guaranteeing that the departing partner will sell their share to a
suitable owner, and it protects departing partners by assuring them a fair price for their shares of the
It’s not easy to determine a fair price in advance. A company’s owners must agree on a price that,
years from now, will represent their firm’s true value. This is obviously a calculated risk: You cannot
know today if your business will prosper in the years ahead or struggle to make a profit. Still, picking
a fair price or a formula for setting the buyout price is essential. There are five common ways to
determine a buyout price:
No matter which buyout method you and your partners choose, it’s important to have an agreement to
avoid future disputes or lawsuits that may delay a transaction or affect the value of your business.