What Is a Buyout, or Buy-Sell, Agreement?

Contrary to popular belief, buy-sell agreements are not about buying and selling companies. Instead, they are binding contracts between co-owners of a business that govern what will happen when an owner wants to leave or a new owner wants to join. Because of this confusion over terminology, we will use the term "buyout agreement" from here on.

A buyout agreement controls the following business decisions:

• Can a departing member force the other members or the LLC to buy him or her out?
• Who can buy a departing member's share of the business? (This may include outsiders or be limited to other LLC members.)
• What is the price for a member's interest in the LLC?
• What other events can trigger a buyout?

What Events Are Covered Under a Buyout Agreement?

Typically, the events that trigger the buyout of a member's interest under a buyout agreement are:

• a member's retirement or resignation
• an attractive offer from an outsider to purchase a member's interest in the company
• a divorce settlement in which a member's ex-spouse stands to receive a membership interest in the company
• the foreclosure of a debt secured by an membership interest
• the personal bankruptcy of a member, or
• the disability, death, or incapacity of a member.