The use and importance of buyout agreements

In most cases, Illinois businesses that are owned by more than one person should have a buyout agreement on file. Buyout agreements, also called buy and sell agreements, are not actually for the purpose of buying and selling businesses. Instead, they function in a manner that is similar to a prenuptial agreement. In other words, a buyout agreement defines the legal relationship between a business's co-owners and dictates how and when a co-owner can sell his or her interest in the company.

The ideal time to put a buyout agreement in place is during the business formation process. This is because the lack of a buy and sell agreement poses a financial risk for all co-owners. For example, if a co-owner of a business files for personal bankruptcy, the business could be impacted if there is no buyout agreement, or the existing buyout agreement was not properly drafted.

Buyout agreements specify when an owner can sell his or her interest in a company, the price for the interest and who can purchase the interest. In most cases, buyout agreements are limited in scope to transactions that take place between the co-owners.

Creating a buyout agreement is part of a new company's best practices. If due diligence is practiced throughout the formation of a new business, then the co-owners may avoid many potential pitfalls. A lawyer with a background in business law may review an existing buyout agreement to ensure that it is properly drafted. If a buyout agreement requires updating, a lawyer may amend the agreement, or replace it with a new one.

Source: FindLaw, "FAQ Regarding Buy Sell Agreements", accessed on Feb. 16, 2015

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