First, what a Buy-Sell Agreement is NOT: A buy-sell agreement is not an agreement to buy or sell a company.
A Buy-sell agreement is a binding contract between co-owners (partners, members or shareholders for instance) that controls when certain events occur that provide for how owners can sell their interest, who will be permitted to buy an owner's interest, rights of first refusal, and what price will be paid. In essence, a buy-sell agreement is (and are often referred to as) a “buyout” agreement.
Buy-sell agreements are important for any business entity, whether a startup, or a going concern, and whether an LLC, C-corp, S-corp, or partnership. Buy-sell agreements are best incorporated into an LLC Operating Agreement or a Corporation Shareholder Agreement. Simply, every co-owned business needs a buy-sell agreement at the moment the business is formed or as soon as possible after formation in order to protect the business owners when a co-owner wants to or is forced to leave the company.
An effective buy-sell agreement will protect the departing owner and, importantly, the remaining owners and company. For example, lets say you and Emily form a Colorado LLC to make virtual widgets that corner the iPhone 6 market. Everything is great and cash is flowing. Then, Emily decides to get divorced. You've never really liked her husband and now you really don't like him - he is demanding 50% of Emily's ownership and has big plans for the Company (something about using all cash reserves to buy all Zune intellectual property and product back-stock.) What you, Emily and the Company can do must be clearly spelled out in the Company's buy-sell agreement. Whether Emily's Ex is entitled to ownership of any of her interest may not be for you to decide, but through a proper buy-sell agreement, your Company can ensure that Emily's ex-husband is not involved in the operations of the Company.
