The function of a buy/sell agreement is to provide a plan for business continuation when an owner, partner, shareholder, or member of a business is unable to or unwilling to continue to run, manage, or own the business. Generally buy/sell agreements come into play when an owner dies, becomes disabled, or retires. The buy/sell agreement provides the plan for the management and ownership of the business after an owner dies, becomes disabled, or retires. Buy/sell agreements are key components to the succession plan for a business. The importance of a buy/sell agreement can be shown with the following scenario:
Scenario 1: AB, LLC is owned by Member A and Member B. No buy/sell agreement is in place, after the death of Member A, Member A's Spouse inherits Member A's interest in AB, LLC. Member B is now running a business with Member A's Spouse even though Member A's Spouse may have no experience in running such business.
Scenario 2: Under the same facts as above, only a buy/sell agreement is in place. After Member A's death, Member A's Spouse is required to sell the interest to Member B. Member B is now the sole owner of AB, LLC and Member A's Spouse has received a large amount of cash to provide support while and to replace the income generated by Member A.
As illustrated in the above scenarios, a buy/sell agreement can help a business continue to operate smoothly with minimal interference, can prevent business owners from running a business with someone that they never intended to run it with, and can provide financial support for grieving family members of a deceased owner